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 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 |
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