Bruce Greenwald's Valuation method and capitalising expenses (operating leases, marketing, ect).
Hi guys,
After reading Bruce Greenwald's books, I've begun valuing companies using his method of valuation (Liquidation/Reproduction values, EPV, Growth). However, I've only just recently started university so I'm still a bit clueless regarding a lot of these things.
I've also read Aswath Damodaran's book on valuation, however, I've chosen to utilise Bruce Greenwald's method.
Even so, I'm conflicted in regards to a common adjustment people do - capitalising operating expenses. Aswath goes into detail regarding these adjustments in his book.
If any of you are familiar with Bruce Greenwald's methods of valuation, do we still need to capitalise certain operating expenses? I've been thinking about it and it would seem that if utilising Bruce's methods, you would end up completely "muddying up" the model.
Anyway, the more I think about trying to capitalise certain operating expenses when using Bruce's method, the more it seems like I shouldn't and should stick to the method. Also, In all the examples of Bruce's method of valuation, I have never seen him or others capitalise operating expenses (such as operating leases, advertising that is likely to result in benefits for many periods, ect).
In fact, Bruce DOES makes adjustments to account for these expenses in other ways but he does not capitalise them. When I think about how Bruce adjusts for these expenses and then think about how Aswath advocates capitalising certain operating expenses, it seems like it would not be possible to use them both together.
What do you guys think? Anyone familiar with Bruce's method care to chime in?
I'd really appreciate your guidance regarding this matter.
Thank you.
"advertising that is likely to result in benefits for many periods"
you find us another AOL?
I'm too much of a newbie to understand what that means, lol.
I am not familiar with Bruce's methods.
I think this can be overdone and do not see this a ton in my line of work.
I would guess that this is industry dependant as well. Pharma you may want to make an adjustment for R&D, Consumer may want to make an adjustment for Advertising, etc.
One area that is well accepted is operating leases since they have similar characteristics as debt and are "off balance sheet" so if they are unaccounted for they could potentially burn you.
@ratking
You're on the right track. That's essentially what he advocates.
That's the issue with Bruce's method of valuation - It seems like it doesn't account for these important aspects. However, I find it hard to believe that someone as knowledgeable and successful (academically renown) as Bruce did not account for these factors. It could very well be that the method does account for these and I just don't realise it due to my limited knowledge.
Hopefully someone who is familiar with his methods of valuation could share their perspective.
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