How do you project capex?
Management will often make indications if they are going to be investing more heavily in capex than usual. This information and commentary can be found in earnings transcripts, annual reports, and the MD&A section of quarterly filings. Based on management guidance, we can either put in the capex directly as a $ amount, or drive […]
If the revenue growth for 2020 is 5%, followed by (10%), 14%, and (8%), what questions would you ask about the business?
I would ask what is causing the decline in revenue in 2nd and 4th year. In particular, I would try to figure out if this is a pricing or volume problem, and if it’s cyclical (ie driven by the economy) or non-cyclical. If it’s non-cyclical, I would try to evaluate if the revenue downfalls are […]
What’s the difference between intrinsic and relative valuation?
Intrinsic valuation is based on future cash flows, while relative valuation is based on the multiples that comparable companies are trading at or the multiples that previous acquisitions (precedent transactions) have occurred. Intrinsic valuation is driven more by assumptions while relative valuation is driven by the market.Intrinsic valuation is can be done on companies with […]
Why do so many investors use a DCF?
A DCF model is very useful for understanding a business’s finances inside and out, and seeing how certain changes in revenue growth, gross margins, etc. could effect the company’s enterprise value. Although a DCF can very rarely guess the exact price of a stock or value of a company, it can provide investors with a […]
How would a decrease in net working capital in your DCF? What does that mean?
A decrease in net working capital would increase unlevered free cash flow. It represents less money being tied up in the daily operations of the business. For example, an increase in the number of days it takes us to pay our suppliers (also known as days payable outstanding) would free up cash.
How would an increase in net working capital affect your DCF? What does that mean?
An increase in net working capital would decrease unlevered free cash flow. It represents more money being tied up in the daily operations of the business. For example, an increase in inventory would tie up more cash.
What are the top 5 questions you would ask management if you were building a DCF?
How do you choose a projection period in the DCF?
Typically, you project 5-10 years because it’s expected that the company will be a mature company after the projection period. Also, it’s often very difficult to project beyond that. Once the company is mature, we can apply a terminal value.
How would you sensitize your DCF?
You would sensitize model assumptions like WACC and perpetuity growth rate / exit multiple. You can also sensitize operating metrics like revenue growth, EBITDA margin, and capex. Finally, you can also look at different upside, base case and downside scenarios.
When does discounting UFCF and LFCF produce the same value? When do they not?
The UFCF method relies on assuming a target capital structure throughout the projection period. However, LFCF may have their capital structure change throughout the projection period as the company pays back debt or borrows more. As a result, they usually result in slightly different values. However, if the target capital structure and the actual capital […]
