Part 2: Using Financial Forecasts in Valuations

Jul 20, 2023 | Finconomics 101, No Bull Economics

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In our last post, we looked at how to use an EV/EBITDA multiple to calculate a company’s value. In this post, we discuss how to complement this analysis by incorporating an EBITDA growth forecast into the equation for a more complete perspective.

Commentary

  • Financial analysis must weigh a company’s past performance along with its going-forward growth prospects. It is not wise to ignore past performance because a company’s track record demonstrates the credibility of both the company and its management team.
  • Stock investors typically place most of their emphasis on forecasts while most lenders (banks & bond investors) are primarily focused on past financial performance. This reflects that stock investors are in the game for the future & the upside while lenders have no upside beyond their interest payments and so are focused on assessing whether they will be repaid in full.  
  • Stock investors seek opportunities in which they can pay the least amount (lowest multiple) for the highest growth potential. Growth investors are typically less concerned about multiples as they are willing to pay up to get into stocks with the fastest growth prospects (like DoorDash).
  • Some stock investors are focused on buying blue chip, quality names and are willing to trade off growth prospects for reliability and brand strength. This explains some of the companies below that have relatively high multiples, but more moderate growth prospects (like Costco).    
  • Finally, some stock investors are patiently holding well-positioned companies with compelling turnaround stories that are not yet baked into the financial forecasts, like those that believe CarMax will inevitably ramp up sales when the economy rebounds and interest rates for car loans decline.   
Top 20 Consumer Retail Company Valuation Multiples Graph

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