Relative valuation is compared with other companies, there are two main methods:
-Comparable company analysis (abbreviated as "trading company" in investment banks).
-Precedent transaction analysis (abbreviated as "Dealcompas" in investment banks)
The former is based on listed companies in the secondary market, while the latter is based on M&A's past cases. There will be real-time pricing every day when the company goes public, so the price is divided by the company's profit indicators (such as sales, operating income, net profit, etc.). ) you can give a "multiple" to compare with other companies in the same industry to see which is cheaper and which is more expensive (P/E, P/B, P/S, EV/EBITDA are all logical). Comparable companies are suitable for listing, depending on what multiples are given by the same industry, or whether it is necessary to give a lot of premiums during mergers and acquisitions (for example, revealing that A's P/E ratio will be 50 times higher than other industries, but only 20 times. At this time, you don't have to consider what premium to give on the basis of 50 times the price-earnings ratio, because it has already been priced in).
There is no market to price the stock of an unlisted company every day, so there will be a new round of pricing only when there is a transaction (such as equity financing and selling old stocks). ). Unless you have participated in the last round of trading before, the outside world can only find the pricing of the last round of trading through digging up the company's official website, annual reports, news and other channels. Precedent transaction analysis is a common valuation method in mergers and acquisitions. The so-called merger and acquisition is actually the sale of old shares, and existing shareholders sell their shares to new shareholders who want to come in.
Another important consideration is the control premium, which is the premium needed to control an enterprise (50%+ shareholding), because control can appoint directors, change management, lay off employees, sell unprofitable departments and so on. These decision-making rights are more valuable than buying a company's stock and waiting for appreciation and dividends. However, comparable company analysis looks at the company's listing transaction level, excluding the control premium. Therefore, it depends on the precedent of holding transactions of comparable companies in history to make a takeover (directly buying 50%+ or increasing the existing shareholding ratio to 50%+).
Let me briefly talk about absolute valuation. There are two common methods for absolute valuation:
-Discounted Cash Flow Analysis ("DCF")
-leveraged buyout analysis ("LBO")
Absolute valuation is more complicated, because it needs to build a model and there are many forecasting details. A simple forecast only needs a rough profit and loss statement, and all three reports of a complex model need to be established. Sales need to be subdivided (product line, high, middle and low end, first, second and third regions+international sales, expansion plan, etc.). ), and debt repayment needs to be predicted separately (how much interest is left in cash flow, under what circumstances, whether it is enough for normal operation, whether short-term borrowing is needed, etc. ).
In a word, DCF is to discount the future cash flow of the appraised object, but it is often used as a reference (calculating the price per share) because subjective factors have a great influence on the hypothesis; LBO mainly focuses on valuing the company's future earnings, and is often used in private equity investment (calculating IRR rate of return).
Different from relative valuation, absolute valuation only focuses on the company itself, predicts its future cash flow, and then comes back to convert its present value. The valuation obtained by this way of thinking can better reflect the intrinsic value of the company. It is called "intrinsic value" because it is based on the analysis results of the company's future development and is not affected by market sentiment fluctuations. But because the model needs many assumptions, DCF is more suitable for companies that can be predicted in the future, such as a coal mine. After exploring the amount of raw materials and predicting the mining cost, we can basically calculate how much money this mine can earn in the future and how much it can sell today.
One of the advantages of DCF is that it is not affected by market sentiment fluctuations. Technically, the figures you finally get can capture the full value of the company, and it has nothing to do with you if the bull market and the bear market get out of control. Of course, if the financial crisis really happens, the final sales price and sales volume may be affected, and the company's valuation will also be affected.
There is not much difference between LBO and DCF It is only a return, so it is mainly suitable for investors, and most of them are suitable for private equity funds (PE) or hedge funds (HF), because the investments they really make big money are often leveraged. Leverage is borrowing money, and borrowing money requires repayment of principal and interest. Therefore, leveraged buyouts are suitable for companies with strong cash flow or a large number of mortgaged assets. Even if these companies encounter problems, they can sell their assets to repay their debts, and they will not let the company liquidate and lose the value of their shares.
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I have done similar company valuation in my previous academic courses, which is more complicated. With absolute valuation, there are many things to consider in future earnings prediction, such as the external environment and internal environment of the company. With relative valuation, it is not easy to find a particularly similar enterprise, because the enterprise structure and business are different; It is suggested that appropriate results can be obtained by comparing these two estimates.