Introduction to Corporate Valuation

Introduction to Corporate Valuation

Sarah Martin

30 years: Corporate Valuations

In this first video on Corporate Valuation, Sarah Martin covers the basic background to corporate valuations, who uses them, why they are needed and also outlines the factors that impact valuation.

In this first video on Corporate Valuation, Sarah Martin covers the basic background to corporate valuations, who uses them, why they are needed and also outlines the factors that impact valuation.

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Introduction to Corporate Valuation

11 mins 56 secs

Overview

Corporate Valuation is a very crucial aspect of financial markets and it needs to be understood by a wide range of professionals. Equities can be very volatile as the markets respond quickly to new information, hence it is vital that we understand the factors that go into corporate valuation and how each factor affects the valuation.

Key learning objectives:

  • Understand how financial forecasts are used in corporate valuation

  • Understand other factors that impact corporate valuation

  • Understand the valuation inputs that can cause immediate and sharp changes

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Summary

What is the role of financial forecasts in corporate valuation?

Valuations are always looking forward, however we also need to assess past results in order to understand the following:

  • How the firm compares to its peers
  • Progress of the firm’s financial results
  • How will past decisions affect the future

Although we may be able to extrapolate historic results into the future, we need to keep in mind that due to the ever changing economic conditions faced by corporates, including volatile inflation and input prices, geo-political risks and weakening demand, forecasting is very difficult. This can lead to volatile valuations.

What are the other factors that need to be considered?

  • Overall level of and outlook for the stock market - A rising market will generally lead to an increase in most valuations
  • Overall liquidity outlook - As liquidity is withdrawn via quantitative tightening and rising interest rates, corporate valuations tend to fall
  • Risk appetite of investors – risk aversion tends to lead to falling equity values, as investors switch to bonds and cash
  • Outlook for key economic variables - This has a significant impact on equity valuations. Some variables are GDP growth, disposable incomes, the savings rate, interest rates and quantitative easing or tightening, inflation and currencies
  • Debt market conditions - When borrowing is cheap, easily available and with limited conditions, this helps drive a rise in equity valuations
  • Dividends and buybacks -  If a firm announces higher dividend growth and/or share buybacks, this is normally positive for equity valuations. However, downward revisions of these will have a negative impact

What are the factors that can cause immediate and sharp changes in valuation?

  • Inclusion or exclusion in a major index - Inclusion of a firm into an index fund means the fund must buy shares of the firm and this is a positive for valuation
  • IPO lock up period - When this period is due to end, if founding shareholders sell their shares, it usually puts downward pressure on the price
  • Company announcements - These have a material impact on valuations, either up or down. Important announcements include those regarding M&A transactions, strategy changes and management changes and financial forecasts

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Sarah Martin

Sarah Martin

Sarah Martin has a degree in economics from the London School of Economics and stock exchange and regulatory qualifications from London and New York. She has worked in investment banking for 17 years, as well as private equity transactions and as an expert witness in financial trials. She became a financial trainer 15 years ago and specialises in credit, distressed debt, and valuation. Recent assignments have included the European Central Bank, the European Investment Bank, the EBRD, Gibbs Business School in Johannesburg, the Bahrain Institute of Business Finance, the Bank of China, BBVA, the African Development Bank, Siemens, Carnegie Bank, Rand Merchant Bank, the Hamburg Central Bank, and Mizuho Bank.

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