How does this work?

Valuecruncher is a tool that allows anyone to complete a public company valuation. Valuecruncher uses the same framework that is used by most corporate finance professionals in the investment banking, equity research and funds management industries. That framework is called a discounted cash flow (DCF) analysis.

The Valuecruncher valuation provides a starting point by automatically generating estimates for each of the key inputs. You can modify these estimates with your own values and Valuecruncher will update the valuation.

Here are some steps you can follow to create your own valuation:

Free Cash Flow

How much free cash flow will the company generate in the future?

First, you should forecast how much revenue you think the company will earn for each of the next three years.

Things to consider when estimating a company's revenues include:

  • The company's latest revenue figures and trends.
  • The size and competitive makeup of the markets the company operates in.
  • The level of demand within these markets and the availability of substitutes.
  • The capacity of the company to increase sales e.g. availability of excess capacity in manufacturing facilities.

Second, you should forecast the percentage of revenue that will translate into free cash flow (the EBITDA margin).

Things to consider when estimating EBITDA margin include:

  • The historic profitability if the company and current trends.
  • the profitability of comparable companies.

To help with this Valuecruncer displays the revenue and EBITDA % from the last full financial year as a reference point.

Capital Expenditure & Depreciation

How much does the company have to spend to generate this free cash flow?

Capital expenditure is a cost that is not included in the revenue or EBITDA margin assumptions.

Things to consider when estimating the capital expenditure amounts include:

  • The acquisition or disposal of operating assets.
  • Research and development costs not included in the EBITDA margin.
  • Changes in net working capital.

The Valuecruncher framework also requires a forecast for terminal capital expenditure. The terminal capital expenditure represents an estimate of the ongoing investment required to facilitate the forecast long term growth. The majority of companies will not have a constant rate of capital expenditure as the investment is often made in lumps. The terminal capital expenditure value should be viewed as a simplified estimate of a more complex series of expenses.

The focus of the DCF approach is understanding how much cash is generated. Depreciation and amortization are accounting measures that do not represent cash expenses. The importance of depreciation and amortization in determining the free cash flow is in the calculation of the company's tax liability. The tax is calculated on the company's earnings after depreciation and amortization have been deducted.

Long term growth (LTG)

The Valuecruncher framework allows you to explicitly forecast free cash flow, capital expenditure and depreciation for the next three years.

In many cases a significant portion of the value of the company will be generated beyond this three year horizon.

The LTG is an estimate of the ongoing growth of the company beyond year three. Most companies will not experience constant growth and the LTG should be viewed as a simplified estimate of a more complex growth profile.

A starting point for evaluating the LTG of a company should be the growth rates forecast in years one to three.

Weighted average cost of capital (WACC)

All of the inputs discussed so far are involved in estimating the future free cash flows of the company.

The WACC "discounts" these free cash flows to provide an estimate of what they are worth today.

WACC represents the required rate of return for the company. This required rate of return applies to all claims on the company's free cash flows (e.g. both debt and equity holders). The estimation of a company's WACC is a subjective input that is a key value driver. For a more detailed view on calculating a company's WACC.

Tax

The tax rate entered is used to calculate the tax payable for the first three years. Beyond that the marginal tax rate of the country of domicile is used.