Company Valuation (discounted cash flow method DCF)

Start-ups will always encounter mergers and acquisitions, shares, etc. The CEO needs to understand some of the company's valuation methods. This article mainly introduces the discounted cash flow valuation methods for your reference;

China asset evaluation association requirements: when evaluating the enterprise value, the applicability of the three basic asset evaluation methods: income method, market method, and asset basic method should be analyzed, appropriate assessment methods should be taken when appropriate. There are many popular methods to evaluate enterprise value, including the basic method of asset value, the method of relative comparison multiplier, the method of discounted cash flow, and the method of economic value-added. Currently, the discounted cash flow method is the most widely used in the company's value evaluation. Therefore, this article focuses on the discounted cash flow method.

Discounted Cash Flow Method

The discounted cash flow method (discounted cash flow approach. DCF) is used to calculate the present value of an enterprise based on the prediction of the enterprise's expected profitability and the appropriate discount rate. This method evaluates different individual assets within an enterprise as a unified and inseparable element. It is not a simple sum of individual assets, however, the capitalization price under the normal operating conditions of an enterprise reflects the future profitability of the enterprise's assets as a whole, and reveals the internal value of the enterprise. Therefore, the discounted cash flow method is the most suitable method for evaluating enterprise value. The discounted cash flow determines that the value of an enterprise is the value of the Right of interest requirements of investors (investors in the broad sense have made various special investment stakeholders for the enterprise). This value is not the past, it is not the current but the actual cash flow that can be provided to investors in the future. Calculation formula:

Cf indicates the enterprise's cash flow for the t-year, K indicates the discount rate, and t indicates the prediction period. Based on the DCF model, many different enterprise value evaluation models, including the dividend discount model, are derived through different selection of CFT, T, and K parameters, free cash flow discount model and EBO model. Based on the free cash flow valuation model that is more affordable and widely used, this evaluation uses the free cash flow valuation model.

Free Cash Flow Model

Using the free cash flow model to evaluate the company's value is to evaluate the company's value by considering the future free cash flow and the opportunity cost of capital. It reflects the cash flow generated by the company's business activities that does not affect the normal development of the company and can be provided to all of the company's capital owners (shareholders and creditors. The process of constructing a free cash flow model can be roughly divided into four stages:

1) forecast the company's free cash flow;

2) determine the continuous value of the company;

3) determine a reasonable discount rate;

4) calculate the value of the company at the discount rate.

Free cash flow: The amount of cash remaining before the cash is paid to all rights holders without affecting the operation and development of the company in the future; meanwhile, free cash flow is divided into two parts: enterprise cash flow and shareholder cash flow. The formula is as follows:

Discount rate:The annual profitability of the Fund based on the percentage of the fund principal, which is also the value lost when the fund that expires one year later is converted into the present value.

Company Valuation Method

According to the discounted cash flow method and the free cash flow valuation model, the company's value calculation formula is as follows:

FCF is the current year's free cash flow. The formula is:

FCF = (net profit after tax + depreciation and amortization) 1 (capital expenditure + increase in operating capital );

WACC indicates the discount rate;

T indicates the nth year;

Continuous value = (free cash flow/discount rate at the end of the evaluation cycle );

Example

The prediction range is from ~ A total of 10 years in 2022; the company's turnover is estimated to be 2013 yuan in 7.2 million. Investment began to produce benefits at the end of 2013, with an estimated turnover of 2014 in 16 million. The following principles are defined based on development trends:

1. continuous operation of the company;

2. The main business revenue growth rate is expected to reach 2014 from 25%;

3. Discount Rate (WACC) 10%;

The following table shows the calculation of free cash flow for the next ten years:

Continuous enterprise value = (free cash flow/discount rate at the end of the evaluation cycle) = (1333.51/0.1) = 133.351 million;

Based on the discounted cash flow method and the free cash flow valuation model, the company's value is:66.5544 million;

Summary

The company's free cash flow is a measure of the return on investment, including all the free cash that can be obtained during the enterprise period. On the premise of continuous operation, it focuses on future operational changes of the company, and the evaluation results are feasible and accurate. However, the future operation of the company is changing, the overall macro environment and industry development may change. The reliability of free cash flow estimation may also be reduced due to uncertainties in the prediction of model parameters and potential opportunities that are not fully considered.