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Hi @Madtrader, thanks for the informative read. Historically,...

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goggledog

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23/08/16

16:09

Post #: 18616152
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Originally posted by Madtrader ↑

The enterprise value is the sum of the discounted cash flows which have been calculated based on what I think each of the outyears will yield in cash. For collections services and expenses generally I used the current state plus what I thought were reasonable growth and inflation rates. For PDL cash inflows I used my multiple analysis to derive cash flows based on PDLs bought the in the last year, 1-2 years, 2-3 years and so on ago. I also then assumed a steady stream of purchases in the future and then derived the cash flows on the same basis. For example the PDL purchases of $64m in years one will then start to yield cash inflows in the future based on the investment returns I have observed after one year, 1-2 years and so on...

The discount rate is generally determined using the CAPM model to find the price of equity (using beta and risk premium) and price of debt and then calculating the WACC. Rather than go through the hassle of calculating beta etc (covariance over variance with company share price returns against index) I used that used by most of the analysts that cover the company (research reports on the company website). Most use around 11.1%-11.2%. As noted I felt I was generous in cash flow assumptions and thus effectively upped my beta slightly to compensate for increased risk. 0.3% doesn't make much difference in the grand scheme of things. The idea of the discount rate is that time costs money and an acquirer of the business would use an industry standard level of gearing and thus have debt (which gets tax shield) and equity which it will need to return a premium over the risk free rate to compensate for risk and the level of return an investor considers reasonable in return for bearing that risk. I always run my own sensitivities as valuation requires a reasonable range of values and then picking a point estimate, rather than saying it must be worth $x which isn't as helpful in my view.

It isn't accounting but a valuation. Two quite different things. In a discounted cash flow valuation you are generally trying to determine the amount of net future cash flows the business will receive and discount them to present value. If you aren't familiar with dcf valuation methodology there are lots of resources on the web (including calculating discount rates etc..)

On your last point (3) I would disagree. I have been involved with quite a number of company acquisitions and valuations and most will use a discounted cash flow model as the base method for valuation. Where you definitely can't use them with ease generally is in start ups, exploration companies etc. where there is no history of cash flows from which to predict.

As noted there are lots of good free resources on the web that will walk you through the high level aspects of company valuations (including using dcf methodology). For more in depth reading there are lots of good books as well, but nothing really beats doing it in practice. As noted before, it is not an exact science (none of it is or we would all give up work and make lots of money easily if we had the formual), but it is a very useful tool in making value judgements. On the face of it high level metrics such as ROCE, P/E, P/B etc. can provide helpful indicators but I wouldn't rely on any one of those in isolation to make my own decisions.

Hope that helps provide some context.

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Hi @Madtrader, thanks for the informative read. Historically, most of my trading has been in start ups and exploration companies but I'm looking to venture out into the scary world of small to mid cap stocks etc. Can you please advise a good book or web resource on how to value companies such as you have alluded to in your post? Thanks in advance.

CLH Price at posting: $1.31 Sentiment: None Disclosure: Not Held
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