Techniques for Deriving Intrinsic Value of a Company.
A comprehensive lesson which involves deriving the intrinsic value of the chosen company. The intrinsic price of the company is compared to the market price to identify overpriced, underpriced or at par stocks in order to establish Sell, Buy or Hold recommendations to investors. The framework can be generalised into five interrelated step as such that the preceding step is highly dependent on the previous one. The steps include (but are not limited to): 1) Strategic Analysis Industry Analysis Competitive Strategy Analysis Corporate Strategy Analysis 2) Accounting Analysis Evaluation of the degree to which the financial statements reflects the economic reality of the company and neutralising the effect of accounting distortions e.g. An abnormal increase in accruals might be a “red flag”. 3) Financial Analysis Evaluation of financial statements, including but not limited to cross sectional and time series analysis 4) Prospective Analysis Forecasting financial statements: This includes first forecasting for each year for 3-5 years than determining the terminal value at the last forecasted year e.g. if the forecasting is done for next three years, terminal value will be the value for year four up to infinity. The last step is to discount the values to present. 5) Valuation This can be done through multiple methods. Commonly used are: Discounted Cash Flow Method, Abnormal Earnings Method and Economic Value Added Method.