Value high growth negative earnings

pinktoadette's picture
Rank: Chimp | banana points 13

How can I value a company that is experiencing 50% revenue growth but high operating expense?
In the financials, they mentioned that that they expect to see this for the next several years.

How does one project the financial statements and value this? Also another thing is that their revenue has 50% of unearned revenue.

Hi Anonymous Monkey, upload your resume and land a job

Members that upload a resume get 2.3x the number of interview invites through the Talent Oasis. Learn more.

Comments (4)

Dec 13, 2014

If all earnings measures are negative including EBITDA, you have to throw out earnings based multiples. You could do some sort of non-earnings multiple (revenue, users, etc) but that can be very dangerous. In general, even if earnings were positive, for a very immature and high growth business, it's going to be hard to find meaningful comps to do a multiples valuation.

For a company like this a DCF is probably the way to go, you can value the company under several scenarios changing growth rates / future margins / how much investment is required, etc.

With the unearned revenue question, I think you are trying to say that 50% of their *sales* are unearned, and thus not yet recognized as *revenue*? So their cash flow is likely greater than accounting revenues would suggest? If there is a pretty wide disparity between when cash is received and when it is recorded as revenue, looking at the company on a cash flow basis is particularly important.

Dec 13, 2014

This is why I'm having a hard time. Seems like I picked a wrong company to look at. I'm curious how analysts look at it then. Wouldn't DCF involve using EBITDA? The EBITDA is negative.

How do analysts value startups then?

Why would CF be greater than accounting revenue suggest? I thought it'd be less. If the revenue is recorded and not yet earned, doesn't that mean cash isn't in yet?

Dec 13, 2014
pinktoadette:

This is why I'm having a hard time. Seems like I picked a wrong company to look at. I'm curious how analysts look at it then. Wouldn't DCF involve using EBITDA? The EBITDA is negative.

How do analysts value startups then?

Why would CF be greater than accounting revenue suggest? I thought it'd be less. If the revenue is recorded and not yet earned, doesn't that mean cash isn't in yet?

Accounting revenue can come before or after cash is received. Unearned (or deferred) revenue refers to the situation where the company has sold a product, received cash, but given the nature of the product isn't able to book all of that cash as revenue yet. The simplest example is something like a gym membership, where you might pay in January $120 to access the gym for the whole year; the revenue would be booked as $10 per month but $120 of cash was received upfront. So at the end of January, you'd have $10 of revenue on the income statement and on the balance sheet, $120 of cash on the asset side and a $110 unearned revenue liability. On the cash flow statement, cash flow from operations would go up by the full $120; income would have gone up by $10 and working liabilities increased by $110 [assuming no expenses/taxes].

In the other situation, you'd have recorded revenue but not yet received cash, and you'd account for that as a receivable asset on the books.

A DCF involves free cash flow, and yes if EBITDA is negative then most likely FCF is negative as well. But negative FCF does not preclude you from valuing a company; presumably you will be projecting negative FCF for a few years and then assuming the business improves and begins generating cash. You would count the present value of the negative FCF in determining the present value of the business just as you would positive cash flows.

Dec 13, 2014

1-Click to Unlock All Comments - 100% FREE

Why do I need to be signed in?
WSO is a knowledge-sharing community that depends on everyone being able to pitch in when they know something.
+ Bonus: 6 Free Financial Modeling Lessons with 1-Click Signup ($199 value)