Scribd
Upload
14 views

Chapter 1 Valuation Concepts Methods Part 2

Uploaded by

tjasonkidd
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
14 views

Chapter 1 Valuation Concepts Methods Part 2

Uploaded by

tjasonkidd
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 19

VALUATION

CONCEPTS &
METHODS
2
The higher a company can raise
its ROIC and the longer it can

“
sustain a rate of ROIC greater
than its cost of capital, the more
value it will create.

3
◇ From an accounting perspective, a
successful business will achieve
profitability by generating more
sales than expenses.

“
◇ But from an investor’s standpoint,
economic profits are what matter —
meaning the firm’s ROIC should
exceed its weighted average cost of
capital.
4
◇ Return on invested capital (ROIC)
is a foundational metric in finance.
◇ A company that is economically
profitable generates profits in
excess of what is required by its
investors to compensate them for
the risk they are underwriting in
a given enterprise.
5
DRIVERS OF
RETURN ON
1 INVESTED
CAPITAL
◇ Strategy, competitive advantage, and return
on invested capital are linked.
◇ A firm may achieve economic profitability by
virtue of a competitive advantage.
◇ If a company has a competitive advantage, it
earns a higher ROIC, because it either
charges a price premium or produces its
products more efficiently (at lower cost or
lower capital per unit), or both.

7
The Structure-Conduct-
Performance (SCP) Framework
◇ The strategy model that underlies the thinking
about what drives competitive advantage and
ROIC.
◇ According to this framework, the structure of
an industry influences the conduct of the
competitors, which in turn drives the
performance of the companies in the industry.

8
The Structure-Conduct-
Performance (SCP) Framework
◇ The structure–conduct–performance (SCP)
paradigm argues that market structure is a
determinant of firm conduct, which in turn
determines performance.
◇ Market structure can be measured by a number
of factors such as the number of competitors
in an industry, the assortment of products,
and the cost of entry and exit.
9
Five Forces that Determine the Intensity
of Competition in an Industry (Michael
1. Porter)
Threat of new entry,
2. Pressure from substitute products,
3. Bargaining power of buyers,
4. Bargaining power of suppliers, and
5. The degree of rivalry among
existing competitors.
10
◇ Companies need to choose strategies
that build competitive advantages to
mitigate or change the pressure of these
forces and achieve superior profitability.
◇ Because the five forces differ by industry
and because companies within the same
industry can pursue different strategies,
there can be significant variation in ROIC
across and within industries.
11
COMPETITIV
2
E ADVANTAGE

12
PRICE PREMIUM COST AND CAPITAL
EFFICIENCY
 Innovative products:  Innovative business
Difficult-to-copy or method: Difficult-to-copy
patented products, business method that
services or technologies contrasts with established
industry practice
 Quality: Customers  Unique resources:
willing to pay a premium Advantage resulting from
for a real or perceived inherent geological
difference in quality over characteristics or unique
and above competing access to raw material(s).
products or services
13
PRICE PREMIUM COST AND CAPITAL
EFFICIENCY
 Brand: Customers willing  Economies of scale:
to pay a premium based on Efficient scale or size for the
brand, even if there is no relevant market
clear quality difference
 Customer lock-in:  Scalable product/process:
Customers unwilling or Ability to add customers
unable to replace product or and capacity at negligible
service they use with a marginal cost
competing product or
service
14
SUSTAINABILITY
OF RETURN ON
3 INVESTED
CAPITAL

15
◇ Length of Product Life Cycle - The longer
the life cycle of a company’s businesses and
products, the better its chances of sustaining
its ROIC.
◇ Persistence of Competitive Advantage - If
the company cannot prevent competition from
duplicating its business, high ROIC will be
short-lived, and the company’s value will
diminish.

16
◇ Potential for Product Renewal - Most
companies need to find renewal of businesses
and products where they can leverage existing
or build new competitive advantages. This is
an area where brands prove their value. Being
good at innovating also helps companies
renew products and businesses.
Example: Apple with iPhone.

17
◇ When companies have found a strategy
that creates competitive advantages, they
are often able to sustain and renew these
advantages over many years.
◇ While competition clearly plays a major

“ role in driving down ROIC, managers can


sustain a high rate of return by
anticipating and responding to changes in
the environment better than their
competitors do.
18
Thank
You!!
Any questions?

19

You might also like