Valuation Methodology. The valuation methodology is supported by an investment theory based on the present value of future distributable profits and the residual value at the end of the projected period.
The investment benefits are assumed to be sufficient to cover the buyer's interest and amortization payments. The present value method of future profits to be distributed can be used to value any type of company.
First, the distributable benefits are calculated. These consist of the expected future income and the effect of whether the company is undercapitalized or overcapitalized. The latter depends on the Net Equity / Assets ratio. If a company has a higher ratio than the sector average, for example 50% and the average of the companies in the sector is 20%, it means that the company is over-capitalized. The opposite occurs when the company is undercapitalized. Our model uses the average Net Assets / Assets ratio of the sector in which the analyzed company performs.
In addition to calculating the benefits that can be distributed, the residual value of the company is calculated at the end of the projected period, that is, the sale value of the company's assets, discounting the liabilities, including the tax on profits resulting from the sale of said assets.
The cost of capital is the rate to receive as a benefit of the investment. One of the ways to determine this rate is to carry out an analysis of the results that alternative investments could provide.
As a customer, you can simulate the effect of future scenarios by changing one of the model values, which would have an immediate effect on the valuation of the company.
Later in this document we will analyze all the variables included in this model and explain them in greater detail.
(See PDF)
Explanations
The table above contains the projections of the value of the company for the respective years. The parameters included are detailed below.
Projected Period
The length of the period is determined by the availability of financial statements. The calculations can be done over longer or shorter periods, but the most common is to do it over a period of seven years, as was done in this case.
I grew Proy. of the Benefits
The value of profit growth is calculated from the average values obtained from years 1-2 and 3-5 of the financial statements. Projected Benefits
The value of the benefits has been calculated by multiplying the income from the previous year by the percentage of expected increase in income for the current year. Proy benefits. after imp.
This value is obtained by deducting 30% of taxes from the projected benefits.
Balance Growth
Based on historical information, a calculation is made to determine the average annual growth of the balance sheet values. Projected Balance
This information is obtained from the latest annual accounts presented.
Pat. Net at closing
This value is obtained by multiplying the projected balance by the ratio of net equity / assets, resulting in the percentage of own capital included in the balance.
Pat. Initial Net
This value gives the initial value for the Net Equity. It is obtained directly from the last balance. In other words, the initial value of a period is nothing other than the final value of the previous year.
Dividends
They consist of the projected value of the benefits to be distributed for the current year. They are obtained by taking own capital at the beginning of the balance sheet + the benefits of the current year - own capital at the closing of the balance sheet.
Current Value Factor
Refers to the factor used to calculate the present value of the respective years. Current value
It is obtained considering the current value factor and the benefits to be distributed.
Comparison with the sector
Analyzing the position of the company in relation to others in the same sector is a very important component in any valuation process of a company. The following in-depth analysis of the main ratios shows what the company's situation is with respect to its competitors in terms of profitability, liquidity and solidity. In other words, in addition to considering the values for each of the companies individually, it is important to pay attention to the trend, that is, the change in the main ratios over time. The main ratios are the significant values of the sector and are then presented in a list with all the ratios.
Returns on Own Resources (ROE)
This ratio measures the profitability obtained by the shareholders of the funds invested in the company, that is, the ability of the company to remunerate its shareholders. Return on equity is a measure of how efficient a company is using the funds that shareholders have invested to generate profit. ROE is very useful when comparing the profitability of a company with that of others in the same sector.
By calculating the returns on equity at opening and closing, the investor can determine changes in profitability over the period. This measure is sometimes sometimes described as private financial profitability.
The return on equity should always be at least equal to or greater than the bank interest rate for deposits plus a risk premium. Otherwise, it could be a better alternative, from a financial point of view, if the owners liquidated the company and deposited the money in a bank account.
Return on capital employed (ROCE)
It is an index that shows the efficiency and profitability of the capital invested in a company. The return on invested capital (ROCE) must always be higher than the rate of the loans that the company takes; otherwise, any increase in loans would reduce shareholder benefits.
A variation of this index would reflect the return on average capital invested (ROACE), which takes the average of the capital invested at closing and at the beginning during a specific period of time.
Return on total assets
This is a ratio that measures a company's profits before applying interest and taxes (BAII) compared to total net assets. This index is considered to be an indicator of the effectiveness of a company in making use of its assets to generate benefits before paying the contractual obligations contracted, that is, it consists of analyzing the profitability of the asset regardless of how it is financed.
The greater the profit of a company in relation to its assets (and the higher the coefficient of said calculation), the more efficient the company will be in using them.
To calculate the return on total assets, the net benefits must be obtained from the company's income statement, and then the interest and / or taxes paid during the year must be added. The resulting amount will reflect the company's pre-tax and interest (BAII) benefits. These BAII must be divided by the company's total net assets (total assets less depreciation and any bad debt reserves) in order to find out the benefits generated by the company for each euro invested in assets.
Net margin (profit before tax)
This ratio expresses the relationship between income and profit of a company or business sector, generally expressed as a percentage, indicating that the amount of euros earned translates into profits. That is, it is the profit obtained by the company, for each sales MU. Net margins vary from company to company, and certain ranges of this margin can be expected depending on the different sectors or industries in the market. Companies within the same industrial sector are expected to present values between certain limits since there are similar restrictions for companies within each sector. A company like Wal-Mart has made a fortune for its shareholders with a margin of less than 5% annually, while in contrast,Some technology companies can achieve net margins of 15-20% or even higher. Companies capable of expanding their net margins over time are generally rewarded with an increase in the share price, since it implies a direct increase in their level of profitability.
BAIIDA margin (Earnings before taxes, interest, depreciation and amortization)
It is an indicator that evaluates the profitability of the company establishing a relationship between a profit (EBITDA) and operating income, to identify how many euros of profit are left for each euro of income. Since BAIIDA comes from revenue, this calculation would indicate the percentage that is kept in the company after operating expenses.
For example, if XYZ's BAIIDA is 1 billion euros and its revenue is 10 billion euros, then its BAIIDA sales ratio is 10%. In general, a high value of this ratio is preferable since it indicates that the company is able to maintain a good level of benefits through efficient processes controlling certain types of expenses.
However, when comparing the BAIIDA margins of companies, it must be ensured that they belong to related sectors, since companies that have a different size and belong to different sectors have different cost structures that would make the comparison result Irrelevant.
BAII margin (Earnings before taxes and interest)
This is an indicator of the profitability of the company that is calculated from income minus expenses, excluding taxes and interest. BAII is also often described as "operating profit" or "operating income." This is a return calculation equal to BAII divided by net income. This value is useful when comparing different companies, especially within the same sector, as well as when evaluating the growth of a company over time. To put it another way: the BAII equals all benefits before taking into account the payment of interest and corporation taxes. An important factor contributing to the widespread use of BAII is how it nullifies the effects of different capital structures and tax rates used by different companies.By excluding both tax and interest expenses, this figure focuses on the company's ability to generate profits and thus facilitates comparisons between companies.
Cash Flow / Rotation
It is a flow of income or expenses that modifies the cash account over a given period. Cash flows usually arise from one of three activities: financing, operations or investment, although it can also occur as a result of donations in the case of personal financial activities. Cash outflows are the result of expenses or investments. And this applies to both business and personal financial activities.
In the case of both companies and personal financial activities, cash flows are essential to determine solvency. Cash flows can be presented as a record of something that has arisen in the past, such as the sale of a specific product; or situations that are expected in the future, expressing what a company or person expects to receive or spend. Cash flow is essential for the survival of an entity. As long as there is enough cash available, creditors, employees and others can be paid on time. If a company or person does not have enough cash to support its operations, it is said to be insolvent, and to be a firm candidate for bankruptcy if the condition of insolvency continued over time.Cash flow is one of the biggest concerns for all small business owners. Faster cash flow turnover may mean more money to be spent on advertising, inventory, and staff.
Net assets (turnover)
It is a measure that indicates the ability of management to use the net assets of a company in order to generate income from sales, and which results from dividing the income from sales by the capital employed. Indicates how productive assets are to generate sales. Too high a figure may indicate a very small investment, while a very low rate (compared to other similar companies) suggests inefficient management.
Companies must be able to manage their assets efficiently in order to maximize sales. The relationship between sales and assets is called the turnover ratio of net assets. Net assets include net fixed assets and net liquid assets.
Inventory rotation
Inventory turnover shows a company's ability to convert inventory into revenue. It closely resembles the turnover of assets and consists of a measurement of efficiency. Inventory turnover is more specific than asset turnover. It is a good indicator of the quality of supply management, stock management, and a company's purchasing practices.
Inventory turnover is the main component of asset turnover for those companies that have little investment in fixed assets but do have large amounts of inventory, and that are generally more of a business rather than a production company.. For companies with a higher capital ratio, the turnover of fixed assets becomes even more important.
Equity / assets ratio
This is one of many ratios used to calculate the ability of a company to meet its long-term obligations. The equity-assets ratio calculates the size of a company's income after taxes, excluding non-monetary depreciation expenses, compared to the company's total obligations. It is a reflection of a company's chances of continuing to meet its obligations.
Acceptable net worth-asset ratios vary from sector to sector, but generally, any ratio greater than 20% is generally considered financially healthy. Most commonly, the lower the net asset-equity ratio of a company, the more likely it is that the company will not meet its obligations.
Debt ratio
The debt ratio is a measure of financial leverage, it indicates the degree to which a company's activities have been financed with its own funds versus funds derived from loans. The higher the level of a company's debt ratio, the riskier it will be considered. As with most indices, the acceptable level is determined by comparing it with the indices of other companies in the same sector.
A company with a high level of indebtedness will be more vulnerable to the bumps in the economic cycle, since it will have to continue meeting its debts no matter how much its sales have decreased. On the contrary, if there is a greater proportion of own financing (equity) in relation to debts, a financial buffer is available and therefore the company is considered to have greater financial strength.
Employee benefits
It is a key measurement index often used by companies and organizations. It is especially important for customer-oriented companies, such as those in the service sector, since they do not sell a product, but rather sell people and relationships. Thus, companies that engage in marketing their products or services through conversation with customers especially value this measure, since they depend much more on their employees. Since this index is much more useful to some companies than to others, it is important to establish whether it is useful to your company. If this ratio is not so important, there are other similar indices that can be used for the same purpose, such as productivity per employee, customer satisfaction indices or, for the public sector, for example cost per employee.By studying this and other similar indexes, it will be possible to better evaluate the initiatives or requests of the clients in relation to the possible impact that they may have on this index and, therefore, if they can be considered “good for business”.
Operating income per employee
This is a very important index that considers the sales of a company in relation to the number of employees they have. It is very useful when comparing companies in the same sector. The ideal for a company is to have the highest level of income per employee possible, since it implies greater productivity.
Employee costs / Operating income
This coefficient indicates the level of investment in salaries of a company compared to similar companies in the same sector.
Average cats per employee
This is total annual expenses by average annual number of employees per month and translated into full-time units. This coefficient indicates the average expenses (excluding the imputations to general expenses) for each employed person.
Projections (See PDF)
Projected benefits
Projected balance
Return on equity as projected
Benefits on projected assets
Starting initials
Starting initials
Profits (EUR '000)
| 2002-12 | 2003-12 | 2004-12 | 2005-12 | 2006-12 | 2007-12 | 2010-12 | 2011-12 | 2012-12 | 2013-12 | |
| It turned out. ordinary before taxes | 745 | 820 | 993 | 1,232 | 1,223 | 1,429 | 1,984 | 2,123 | 2,379 | 2,330 |
EUR 1,763,000
Present Value EUR 1,763,000 How is this value calculated?
The value of the benefits has been calculated as a weighted average of the results over the last 10 years. The weighting is achieved by giving the most recent years a greater relative weight than the more distant ones. To avoid extraordinary income or expenses, the “net profit” item in the financial statements is not used, instead, the “income after financial concepts” item is used. Why make adjustments?
If the benefits do not match the company's expected income for the current year, an adjustment can be made. The value of the benefits must also be adjusted in case the income or expenses recorded in the accounting books are not normal. For example, a private company owner may make too high or low a deduction from her salary as an employee relative to other employees.
Profit growth
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |
| I grew Proy. of Benefits (%) | 2.7 | 3.5 | 4.0 | 4.5 | 4.0 | 4.0 | 3.0 |
Average value 3.7%
Historical average 15.6% How is this value calculated?
The value of income has been calculated as a weighted average of the results over the last 10 years. The weighting is achieved by giving the most recent years a greater relative weight than the more distant ones. To avoid extraordinary income or expenses, the “net profit” heading of the financial statements is not used, instead, the “profit after financial concepts” item is used. Why make adjustments?
It can be difficult to calculate profit growth using historical data. For example, benefits may be affected by earnings that carry over from one financial year to another. In order to achieve the most accurate value possible, the sales estimates for the last years should be used as the basis for the calculation. For subsequent years, growth should be calculated that is sustainable over the projected time period.
Initial Values- Balance
Balance
EUR 6,064,000
Present Value EUR 6,064,000
How is this value calculated?
This value is obtained from the last annual accounts presented.
Why make adjustments?
The assets of the company are recorded for accounting purposes at their book value. These values may, for various reasons, be different from their real value. For example, goods or equipment that have been totally depreciated may still have some value, or conversely, some goods may have a lesser value than books because of damage, etc. Own capital, in relation to liabilities, is not automatically adjusted with changes in the balance sheet. Own capital has to be manually edited for it to change.
Balance Growth
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |
| Balance Sheet Growth (%) | -0.3 | 13.7 | 13.7 | 13.7 | 13.7 | 13.7 | 13.7 |
Historical Average 9.9%
How is this value calculated?
An average increase in the balance sheet is calculated based on historical values.
Why make adjustments?
Important investments may be necessary for future expansions. These investments will give the company greater growth than previously obtained. It may also happen that the company has completed a strong expansion phase. In this case the balance will not grow as much as it had been doing previously.
Net equity
EUR 2,340,000
Present Value EUR 2,340,000 How is this value calculated?
The initial balance of own capital is obtained from the last annual accounts presented. To this is added the total reserves, previously subtracting 30% of taxes. Why make adjustments?
If the balance of the balance changes, the equity must be adjusted. See Balance.
Initial Values- Net Worth / Assets Ratio
Equity / Assets Ratio
27.1%
Sector Median *%
Net Equity / Company Assets Ratio: 38.6%
* Plumbing, installation of heating and air conditioning systems.
How is this value calculated?
This index shows the percentage of Net Equity in relation to the liabilities and is a crucial element for the valuation. To determine whether the company is overcapitalized or undercapitalized, the ratio of the sector is compared to that of the company. If a company has a higher ratio than the sector average, it means that the company is over capitalized and this difference will be incorporated into distributable profits. The opposite occurs in case the company is undercapitalized, in this case, the benefits to be distributed will decrease.
Why make adjustments?
The capital structure depends on the percentage of liabilities and own capital. If the company's ratio is very low, that is, the value of liabilities far exceeds the value of equity, problems can arise in the case of an expansion plan or an economic recession. On the other hand, if the equity / assets ratio is very high, the return on investment will be lower. The return on equity must normally be higher than that paid on the funds of others.
Capital cost
11.3%
Original value 13.7%
How is this value calculated?
The cost of capital is the interest that you want to receive as a benefit on the investment. The cost of capital is an important element in the valuation of a company and is, in turn, made up of two sub-components.
- In this valuation, the state's passive rate was used as a basis, this index is usually known as "risk-free interest", in a situation of price stability. Given that investors are exposed to risk, a premium is calculated in the rate of return for said risk. This premium may vary depending on the calculated level of irrigation, but a standard rate is within 7% - 10%. Why make adjustments?
In the event that the intention is not to obtain an economic value from the company, but to be able to compare the value with other investments. After a purchase, for example, the financing of a loan may be different, which would imply a change in the interest on the debt. The ratio between third-party capital and own capital is also decisive (more information in the previous section of the equity / assets ratio) Likewise, there could be different required rates of return on equity.
Initial Values- Methodology for calculating the residual value
Methodology for calculating the residual value
Start-up company
The value of a company includes, in addition to income that can be distributed, the value of the company at the end of the projected period. This terminal value can be calculated in two ways. One of them is calculating the liquidation value, that is, the assets minus the liabilities. And the other is using a “going concern” value, which means that the company continues with its activity and indefinitely earns the same level of profits as the last year of the projected period.
The method used will depend on the nature of the company. If it is a small company, dependent on certain key employees, the company is not likely to continue operating indefinitely. In this case, the residual or terminal value will be determined using the settlement method. On the other hand, if it is a large company and does not depend on key employees and is supposed to be able to continue generating profits in the future, the “going concern” method will be used.
Faqtum's responsibility
There is no such thing as a definitive value of a company, that is, the value is based on the initial values entered in the valuation model. Therefore, Faqtum cannot guarantee that this valuation is final or final, for example in the case of a purchase / sale. All the information compiled was obtained from sources considered to be reliable. However, there can be no guarantee that the information provided by such sources is complete and accurate. Faqtum does not assume any responsibility for direct or indirect damages of any nature that may arise from the use of this assessment.
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