Determination of model input parameters

The starting point of the company valuation in our model is forecasting future yearly revenues. It is based on the total revenue of the last year for which financial data is available.

Another parameter that is absolutely crucial for valuation and the one that is especially difficult to forecast is the revenue growth rate. When you are not very familiar with the company or do not have an opinion about its growth prospects, we suggest to use the year-over-year quarterly revenue change for the last quarter reported as the revenue growth rate for the first forecasted period. Unlike the annual revenue data, that changes, by definition, only once a year, it allows for faster (four times per year) factoring in of actual company's performance.

The revenue growth rate that we've just described is only used for the first forecasted period. For each of the all subsequent years, in general, the revenue growth rate should be set individually. This, however, in most of the cases is insurmountable task. For simplicity, we can assume that on average the revenue growth rate for all companies in the long run will approach the long-term revenue growth rate for the national economy (i.e. the GDP). Thus, we assume that the terminal revenue growth rate is equal to the long-term GDP growth rate. Further, the forecasting is made a lot easier if we just specify that for each year the revenue growth rate will be equal to the previous year's revenue growth rate multiplied by a revenue decline factor, that makes the forecasted year's revenue growth rate to be equal to a fixed fraction of the difference between last year's revenue growth rate and the terminal revenue growth rate.

Data requirements and sources

data parameter abbreviation
balance sheet
Cash and Short Term Investments CASH
Total Receivables, Net RECVBLS
Total Inventory INVENTORY
Prepaid Expenses PREPAID
Total Current Assets CURASSETS
Property/Plant/Equipment, Total - Gross PPE
Accumulated Depreciation, Total ACCDEPR
Goodwill, Net GOODWILL
Intangibles, Net INTANGBLS
Long Term Investments LTINVEST
Total Assets TTLASSETS
Notes Payable/Short Term Debt STDEBT
Current Port. of LT Debt/Capital Leases CURLTDEBT
Total Current Liabilities TTLLIABIL
Total Debt TTLDEBT
Total Equity EQUITY
Number of shares outstanding SHARES
income statement
Total Revenue REVENUE
Total Operating Expenses OPEXP
cash flow statement
Depreciation/Depletion DEPREC
Amortization AMORTIZ
Changes in Working Capital WCCHG
Cash from Operating Activities OPCF
Cash Interest Paid INTPAID
other sources
Inflation INFLATION
user-defined parameters
Terminal revenue growth rate TERMREVGR
Revenue decline factor REVDECL
Service life of production assets SLIFE
Years goodwill amortizes GWAMORT
Corporatetaxrate TAXRATE
Cash flow adjustment to revenue CFADJREV
Initial discount rate DR
Discount rate multiplier DRMULT
Proportional claim of current shareholders on cash flows PORTION
Adjusted equity ratio EQRATIO

Calculated input parameters

Input parameter Abbreviation Calculation formula
Net debt NETDEBT TTLDEBT - CASH
Funds from operations FFO OPCF - WCCHG
Capital CAPITAL TTLDEBT + TTLEQUITY
Revenue growth rate REVGR REVENUE / REVENUEprev - 1
Total expenses growth rate EXPGR OPEXP / OPEXPprev - 1
Adjusted total assets ADJASSETS TTLASSETS - CASH
Adjusted total liabilities ADJLIABIL ADJASSETS - EQUITY
Production assets PRASSETS PPE - ACCDEPR + INTANGBLS
Average production assets AVGPRASS (PRASSETSprev + PRASSETS) / 2
Non-financial working capital NFWC (CURASSETS - CASH) - (TTLLIABIL - STDEBT - CURLTDEBT)
Interest rate on debt INTRATE INTPAID / (0.5 x (TTLDEBTprev + TTLDEBT))
Variable cost factor (variable/total expenses) VARCOSTF EXPGR / REVGR
Production assets + Goodwill PRASSGW PRASSETS + GOODWILL
Production assets to evenue PRASSREV AVGPRASS / REVENUE
Working capital to evenue WCREV  NFWC / REVENUE
Fixed expenses FIXEDEXP OPEXPprev x (1 - VARCOSTF) x (1 + INFLATION)
Average depreciated life of production assetsl, years DLIFE 0.5 X (PRASSGWprev + PRASSGW) / (DEPREC + AMORTIZ)
Tangible net worth TNETWORTH EQUITY - GOODWILL - INTANGBLS

NOTE: suffix "prev" indicates that the value of the parameter is for the previous year

 

 

Valuation algorithm

1. Introduction

2. Model input parameters

3. Calculation of intrinsic value

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