Financial Analysis and Valuation – Opportunities and Challenges

byDr Shantha P YahanpathDirector, Agape International and Lecturer at Sydney Business

SchoolAustralia

Key issues Forecasting or guessing Historical background Development of theory Efficacy of models Practical relevance Paradigm shift and velocity of Change Future opportunities

Forecasting or guessing

A child was asked what her future profession would be…and she replied…my future profession is not here today…it is not known to us today but it will be there when I get there

Historical background Constant growth models Variable growth models CAPM - M Miller, Sharp, Lintner, Black and

Scholes Price:earnings models Cashflow models Asset-based models Experience based models

Forecasting involves:

Estimation Guessing Based on information available at the

time of forecasting

Theoretical issues Mathematical complexity by-passing

plausibility Crude assumptions distorting the value of

inputs Difficulty in valuing intangible assets like HR

resources eg. managerial talent, brand value Valuing corporate activity eg. M&A Impact of future competition

Efficacy of models depends on: Theoretical plausibility Explanatory ability Practical relevance Accuracy of parameter estimates Forecasting ability Simplicity

Practical relevance - accuracy Spread of valuation ranges Technological developments Changing business paradigms -

velocity of change Valuation of knowledge Effect of assumptions

Paradigm Shift – Intellectual capital rules Soil to steel and steel to software - agriculture

to manufacturing and manufacturing to information technology

Brains matter more than brawn - how much you know maters more than how much you can lift

Innovation matters more than mass production – a product’s value is measured not in kilos but by the weight of ideas that went into making it

Information matters most of all – how easily it can travel through the economy and how well it is used

Opportunities

Participation of multi-disciplinary teams Problem oriented research Re-visit the past Challenge to academia - bring back relevance Invest more effort in alternative forecasting

and Bayesian approach Appropriate models for small businesses

Velocity of change – enemy or friend?

Some models were developed during “industrialisation”

Such models have been “creatively destructed” - models have gone past their use by date

http://www.forbes.com/sites/jimblasingame/2012/10/08/managing-the-velocity-of-change/

http://www.ey.com/Publication/vwLUAssets/EY_CIO_-_The_velocity_of_change/$FILE/EY-CIO-The-velocity-of-change.pdf

Company ValuationsIs future past?

Back to Basics? Are we back to judgemental approach?