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Valuation From Comparables and Valuation From Comparables and Financial Ratios A Practical Approach You now know how to read financial statements, how to obtain
with a specific spreadsheet example for The Black and Decker Corporation. Free cash flow valuation and comparables (comps) are key tools in fundamental analysis,
level of risk and often little or no revenues, traditional quantitative valuation methods like (P/E) per-share earnings comparables or discounting free cash flows
We used the DCF method to value BT. This is based on the fact that BT is a relatively stable business with cash flows that can be forecast and a terminal value that
system, tracking of vehicles and billing has created a high valu added potential. 3.2 Valuation multiples and comparables From year 2 to 5, an average EBIT of 2 times
Submitted by grandeale83 on March 29, 2007
Category: Business
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Valuation From Comparables and
Financial Ratios
A Practical Approach
You now know how to read financial statements, how to obtain cash flows from financial
statements, and how to value them. You also know that forecasting cash flows is a very
difficult task. Are there any shortcuts? Are there any good alternatives to NPV? Is there
anything else you can do with financial statements?
Surprisingly, the answer is yes. There is one alternative approach often resorted to by practitioners.
It is called "valuation by comparables," or "comps" for short. Executed correctly, comps
can give answers that are as good as those that you can obtain with a thorough NPV analysis.
In practice, sometimes the method of NPV gives a better value estimate, and sometimes the
method of comparables does.
The basic idea behind valuation by comparables is simple and best understood by analogy:
assume that you want to determine the value of 5 red marbles. If black marbles cost $2 apiece,
and if you are willing to make the assumption that red marbles are valued like black marbles,
then you can compute that the value of your 5 red marbles should be $10. It is not necessary to
forecast what value marbles will have in the future or what discount factor applies: the market
price of black marbles has already taken all this information into account.
Of course, the more similar black marbles are to red marbles, the better this method will work.
If they are not, you can go spectacularly wrong. If black marbles are made from coal and red
marbles are made from rubies, then your value estimate can be orders of magnitudes off.
In sum, the method of comparables relies on three assumptions:
1. You can identify projects that are close comparables. Here it is "other marbles."
2. You can identify a measure that is value-relevant. Here it is "being a...
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