Value Investing by Tankrich
Value Investing by Tankrich
Value Investing by Tankrich
Tankrich
OC TOB ER 4 , 2 015
Here is one page snapshot on what drives value of company (and its ownership parts called shares)
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What drives value of a business – Part 1 – Tankrich 17/06/19, 9)56 PM
(https://i1.wp.com/www.tankrich.com/wp-content/uploads/2015/10/Value-1.png)
In this post I am not going to dig into those valuation parameters as I have detailed post on these parameters in past,
you can read them here (https://www.tankrich.com/value-companies-cera/) and here
(https://www.tankrich.com/2014-48-value-companies-noida/)
We are going on spend some time today on inputs that drives these valuation parameters to draw some conclusion to
refine at the process on how we approach on valuing business
Given we are dealing with 7 input factors this post would be in two parts
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A company which converts its revenue to cash flows higher in proportion to other companies in similar industry
should be valued more
A company which has relatively less cash expense (better credit terms, tax advantage, deferred expenses)
compared to other companies in similar industry should be valued more
A company which has lower capital and maintenance expenses compared to other companies in similar industry
should be valued more
Earnings
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A company which has underutilised capacity with an opportunity to operate at full capacity has potential to sell
at higher value when it operates at full capacity
A company which has pricing power will be valued relatively more than companies which don’t have pricing
power
A company which has lower cost structure compared to peers in industry should be valued more
Growth Rates
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(https://i2.wp.com/www.tankrich.com/wp-content/uploads/2015/10/Value-4.png)
To ensure we don’t err in valuing in companies, it always better to assume conservative growth assumptions
relative to GDP growth rates and Industry growth rates
Intuitively companies in countries which are growing fast and in growth stage of industrial cycle would be valued
more than others
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(https://i2.wp.com/www.tankrich.com/wp-content/uploads/2015/10/Value-5.png)
Applying discount rates is a complex art, it’s a number which is very difficult to arrive as discount rates is function of
individual’s opportunity cost, prevailing and future interest rates and current and future AAA bond yield
It is very complex to model a perfect discount rate, So we should rely on scenario analysis with 3-4 rates and then
make best guess
Lower discount rate would increase value so declining interest rates would result in higher value
Related
What drives value of a business - Get a framework to understand Case Study - Value Companies -
Part 2 Value CERA
(https://www.tankrich.com/2015- (https://www.tankrich.com/2015- (https://www.tankrich.com/value
41-drives-value-part-2/) 31-value-drivers/) -companies-cera/)
October 10, 2015 July 18, 2015 November 9, 2014
In "Valuation" In "Valuation" In "Valuation"
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Valuation
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5 comments
regarding FCF , some people take cash from operation-cash from investing-cash from finance to be FCF ( FCF= CFO-
CFI-CFF),
in ur writing above its diff. Also may we assume cash from operations to be taken from the cash flow statement of the
company ?
Reply
https://www.tankrich.com/2015-40-drives-value-part-1/ Page 7 of 9
What drives value of a business – Part 1 – Tankrich 17/06/19, 9)56 PM
Thanks Saurabh — FCF should be CFO-Capex both of them are their in CF statement, However a better
approximate is Normalised CFO – Normalised Capex – Normalised WC but these involve heavy estimations
and thus errors
Reply
Very nice write up Vivek, your explanation with graphs and images makes it easy to understand.Thank you very much
Reply
Thanks Sarin
Reply
Disclaimer
The content published on this blog is personal opinion of author, reader is responsible for their action with no
accountability of author
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