Tips for a third valuation method
Hi guys. Was given a 3-statement model and am done with the forecasts as well as two valuation methods: DCF and comparables. I meant to do a contingent claim valuation since I have all the required input. However, that valuation does not make sense for some reason and I am now looking for the best way forward...
Some details about the company:
- IT Software
- Negative operating income for the next 3-4 years at least
- High revenue growth (100% but decreasing)
- High fixed costs
- Very clean balance sheet
Let me know if you need any further details.
Also, if anybody has experience with contingent claim valuation, then feel free to have a look at my attached worksheet which only contains the CCV. Thanks!
| Attachment | Size |
|---|---|
| Real Option Valuation.xls 24.5 KB | 24.5 KB |
Forgot to mention that it's for an Equity Research interview!
Feel like precedents would be the only other real method for them.
Looking at similar companies in history? Never heard of the method...
Precedent analysis is essentially looking at what multiples past companies in a similar sector got bought out at. Since it is projected to have negative earnings for the next few years, you'd probably want to compare EV/EBITDA multiples to arrive at a valuation.
yup. basically, the rationale is the people buying these companies will have done their due diligence and realize whether they can have a positive return on their investment vs their cost of capital. i'd look at a mix of both sponsor and strategic acquisitions if possible (due to strategics probably paying a richer valuation due to synergies).
Look at the company R&D expenses if available. If that is the reason of a negative EBITDA, capitalize the part of R&D expenses exceeding the "normal" R&D expenses the company would bear after its high growth phase. Also look at operating leasing and see if you can capitalize it.
As far as for the multiple to use, it would only make sense to use EV/Sales or industry specific.
Hope it helped!
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