It ain’t easy being valued

 (Though from recent experience I argue that being the valuer is the harder job).

A couple of weeks ago I was given the task of analysing five publically listed companies’ annual reports over a five year period, so that I could guesstimate where each company sits in the market in terms of value, strategy and market share, and how a privately owned company in the same space might compare.

It wasn’t easy, but I learned a lot (mainly that it wasn’t easy).

I started out by analysing the changes in revenue and net profit of each company over the five year period, to give me an indication of each company’s strategy over time. When I graphed the results I could see how each measure compared over the period and the general trend of the measures (i.e whether they grew closer together or further apart), which meant I could begin to understand how money was earned and how it was spent in the company.

For example, one company I looked at had increased their revenue 170% over the five year period and increased their net income by 50% (whoo hoo!). However, I could see that the gap between their revenues and incomes was also growing so they were becoming more unprofitable, and by looking back at the financials I could see that over the five year period they had spent $50 million of shareholder investment to make $40 million worth of revenue in 2010, and in the same year generated a net income of $-15 million, which suggested that they were investing in growing their market share to the detriment of their shareholders (their market capitalisation declined 78% over the five year period).

Of course if it were as straightforward as this then things would be a little easier, there is always more going on than is shown in the financial reports. In the example I have just used, the company may well have developed millions of dollars’ worth of IP over the five years and be ready to pounce on their increased market share with a new product.

I also compared market cap data (# of shares outstanding times share price) with revenue and EBITDA to use as an indicator of how the market values a company in the industry I was interested in. For example, the average company in the industry might be valued at 5 times revenue or 15 times EBITDA ($1 million mar cap when its revenue is $200,000 or EBITDA is $67,000). Knowing the average multiplier was useful in predicting the value of a private company in the same space.

The process wasn’t easy, quick or in any way complete, but the data gathered using the measures above does give me a picture of value, strategy, income and expenditure in the market I’m interested in and provide me with a basis for future analysis and comparisum (along with a couple of premature grey hairs).

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