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Valuing a Company Using DCF

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25 views16 pages

Valuing a Company Using DCF

Uploaded by

getmedude
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Valuing a

Company
Using a DCF
in 6 Steps

Dave Ahern @IFB_podcast


What is a DCF?
Discounted Cash Flow
(DCF) estimates
investment value
using projected future
cash flows.

Dave Ahern @IFB_podcast


Six Steps
1. Estimate Growth
2. Calculate NOPAT
3. Calculating Reinvestment
4. Calculating FCFF
5. Discount & Terminal Rates
6. Putting It All Together

Dave Ahern @IFB_podcast


Step One:
Calculating
Growth
We have 3 ways to estimate
growth:

1. Historical averages
2. Analyst estimates
3. Based on fundamentals

Dave Ahern @IFB_podcast


3 Ways to Estimate
Growth
1.Historical
2. Analyst Estimates
3. Fundamentals

Historical Performance: Google’s averages = 19.84% .


💰19.38% 10 year CAGR
📊18.38% 5-year CAGR
📈21.36% 3-year CAGR
Analyst estimates: 3-year average 9.75%
1-year - 5.46% CAGR
2-year - 11.50% CAGR
3-year - 12.30% CAGR

Fundamentals
3-year average reinvestment rate = 18.59%
3-year average ROIC = 40.56%
Reinvestment Rate = 18.59% x 40.56% = 7.54%

Dave Ahern @IFB_podcast


Step Two:
Calculating
NOPAT
NOPAT = Net Operating Profit
After Taxes
It is the foundation for free
cash flow and we calculate it
by:

EBIT (1- tax rate)

Dave Ahern @IFB_podcast


Understanding
NOPAT
Top 3 NOPAT KPIs:
NOPAT Margin
ROIC
Free Cash Flow to
NOPAT

Revenue

EBIT – Costs of
Goods Sold

– Operating
Expenses
NOPAT

Income
Taxes
Remember
earnings are 1 - Tax Rate
an opinion,
but cash is a Operating
Income
fact.

Dave Ahern @IFB_podcast


Step Three:
Calculating
Reinvestment
Every conpany has to reinvest
to grow, even Nvidia.

We can use the Sales to


Capital Ratio to measure and
capture those reinvestments.

Dave Ahern @IFB_podcast


Sales-to-Capital Ratio
How to Calculate
Sales-to-capital ratio measures efficiency of capital use: total sales
revenue divided by invested capital in a period.
It assesses how well a company uses invested capital to generate
sales. A high ratio indicates efficient reinvestment and operations,
while a low ratio suggests potential issues in capital usage or
investments. Tracking changes over time offers insights.

Sales-to Capital = Sales / Invested Capital

Sales or Revenues
💵 Sales = $14,473 million
Mercado Libre Sales = $14,473 million

+Current portion of long-term


+Short-term debt
debt = $2,465
+Long-term debt +Long-term debt = $2,885
= Total debt
+Shareholders' Equity = $3,071
+Shareholder equity -
Cash&equivalents/Investments
-Cash & Marketable Securities = $6,036

=Invested Capital Invested Capital = $2,385

Dave Ahern @IFB_podcast


Step Four:
Calculating Free
Cash Flow to the
Firm (FCFF)
The base of our DCF
(discounted cash flow) is the
Free Cash Flow to the Firm

Dave Ahern @IFB_podcast


Free Cash Flow to the
Firm
NOPAT

Depreciation &
Amortization

CAPEX

Change in
NWC

Free Cash Flow to


the Firm
Step Five:
Discount Rates
Discount rates and terminal
rates are critical for a DCF,
determining present value of
future cash flows and
perpetuity value.

Dave Ahern @IFB_podcast


Breaking Down WACC
Simply
WACC stands for Weighted Average Cost of
Capital. It is a financial metric used to
calculate the overall cost of capital for a
company, taking into account both debt and
equity financing.

WACC = (E/V) Ke + (D/V) Kd * (1 - Tc)


Mastercard WACC
Weighted Cost of
Cost of debt
Debt
2.59%
0.10%
4% Debt WACC
=
10.33%
Weighted Cost of
Cost of equity
Equity
10.67%
96% Equity 10.23%

Dave Ahern @IFB_podcast


What is Terminal Value?
Terminal value is the estimated value of a business at the end of a
forecast period, reflecting its perpetual growth potential. It accounts
for the bulk of the total value in discounted cash flow (DCF) models
and is crucial in valuation for long-term investment decisions.

Terminal Value Formula example 1:


At a 9.27% WACC, 4.02% growth rate,
FCFn $85.7B in free cash flow is now worth
tv = $85.7b
WACC - G TV = = $1,632B
9.27% - 4.02%
FCF = Final year FCF
example 2:
WACC = Weighted Average Cost of
Capital or Discount rate At a 8.7% WACC, 4.43% growth rate,
g = perpetual growth of FCF $111.5B in free cash flow is now worth
n = number of years $111.5B
TV = = $2,611B
8.7%-4.43%
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Step Six: Putting
It All Together
Now we take all of our inputs
and we calculate the value of
Google or any other company
.

Dave Ahern @IFB_podcast


Based on the market price of
$191+, the market is pricing in
16% revenue growth, all things
equal.

Dave Ahern @IFB_podcast

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