The Art of Company Valuation - Advanced course | Candi Carrera | Skillshare

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The Art of Company Valuation - Advanced course

teacher avatar Candi Carrera, Value investor & board director

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

23 Lessons (6h 39m)
    • 1. Introduction

      11:53
    • 2. Defining Value

      12:15
    • 3. Valuating Companies

      16:25
    • 4. Valuation Categories

      12:10
    • 5. Asset Based Valuation - Market capitalization

      13:44
    • 6. Asset Based Valuation - Book value

      12:30
    • 7. Asset Based Valuation - Adjusted Asset Method

      17:28
    • 8. Asset Based Valuation - Adjusted Asset Examples

      50:14
    • 9. Asset Based Valuation - Liquidation Value

      21:57
    • 10. Going Concern Valuation - Multiples

      11:08
    • 11. Going Concern Valuation - Cash flow to Firm & Cost of capital

      45:37
    • 12. Going Concern Valuation - Cash flow to Equity

      31:44
    • 13. Why Relative Valuation and Price to Book

      15:45
    • 14. Relative Valuation - Price to Cash Flow

      8:30
    • 15. Relative Valuation - Price to Earnings

      12:06
    • 16. Relative Valuation - Price to Sales

      5:52
    • 17. Relative Valuation - PEG or P/E to Growth

      8:59
    • 18. Relative Valuation - Entreprise Value (EV)

      11:26
    • 19. Special Valuation situations - Merger & acquisitions

      16:24
    • 20. Special Valuation situations - Private Equity & Venture Capital

      19:04
    • 21. Special Valuation situations - IPO & DPOs

      17:21
    • 22. Special Valuation situations - Banks

      11:28
    • 23. Conclusion

      15:10
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About This Class

Knowing what an asset is worth is a prerequisite for intelligent decision making. As an investor I always want to know what the intrinsic value is vs current share price or the price the seller is offering (if private equity) and if I have a safety margin on the price.

BE AWARE this course is an ADVANCED LEVEL course.

After this course you will be autonomous in evaluating companies. You will be equipped with a set of methods and knowing how to apply those methods in the public equity, private equity or venture capital universe :

  • asset-based valuation (cash to market cap, book value, modified book value, liquidation value)

  • going concern valuation (multiple revenue/earnings method, Free Cash Flow to Firm including DCF & DFE, Free Cash Flow to Equity including DDM, Gordon & Total shareholder yield)

  • relative valuation to understand the financial strength of a company (P/B, P/CF, P/S, P/E, PEG, EV)

Investing requires practice. In this training we will practice all absolute & relative valuation methods with 4 companies being 2 luxury companies (Richemont & Kering) & 2 tech companies (Apple & Microsoft). We will apply all our learnings each time for those 4 companies instead of using dummy companies that do not exist. The course will also cover special valuation situations like VC investments, IPOs/DPOs and banks. In those special valuation situations, we will be practicing on companies like Fitbit, GoPro, Etsy for the IPO/DPO part and Bank of America & Wells Fargo for bank valuation part.

After this course you will be able to determine the real value of a company vs the current share price. If you want to become a fully independent investor with deep valuation methods, this course is for you.

Investing in stocks and acting as a business-owner can be a life-changing experience. Learn from my 20 years experience as an investor running my own investment fund and rapidly move ahead faster with the knowledge I will share with you.

Meet Your Teacher

Teacher Profile Image

Candi Carrera

Value investor & board director

Teacher

Hello. My name is Candi Carrera and I am a value investor for more than 20 years with 90% of my personal savings invested in stocks. My main attitude as value investor is to buy shares as if I would be buying the whole company, acting as a business owner and understanding the business I am investing into.

I keep the remaining 10% as a cash reserve to buy more stocks as market corrections and bear markets happen regularly. During bear markets, investors are depressed and become pessismistic. I take the opportunity during those depressed periods of buying great companies at low prices. As famous investor John Templeton said : "If you want to have a better performance than the crowd, you must do things differently from the crowd".

Through these courses, my personal goal is to... See full profile

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Transcripts

1. Introduction: Welcome investors to my training about company valuation as the title states, it's, this isn't advanced training for investors. So if you're interested in studying into investing, I would recommend you starting first with the value investing on dividend investing course, depending on the kind of style that you are looking into in terms of investor. This is more really in-depth training about company valuation where we're going to discuss, but how to evaluate companies from a financial perspective. And this will work as well for startups, private equity venture capital, but also for a public equities. So secondary market companies that are listed on stock exchanges. So with that, thanks again for joining and let's get started. Vm. I like to kick off this training actually with the statements from Oswald's dam on Duran, who is considered today to be the dean of company valuation. He's a professor at New York Stern School of Business and New York University. And I like his statement because it says that knowing what an asset is worth is a prerequisite in making in order to make intelligence investment decisions. And this is absolutely true, and this is what we're going to practice during the whole training, is really trying to give you the tools, multiple tools to be able to, not just to understand what maybe analyst if you are a public equity investor, but also what valuate us saying about companies and that you understand and try and be able to determine the real value of a company. Many techniques that we're going to be an IO, going to be walking you through in this training. So if look at the table of contents as we are still in the introduction lecture. So in the intro, we're going to look into defining value. What is value creation? Why people actually are evaluating and analyzing companies? And I will be walking you through already the first glimpse into valuation categories and methods. Then in this training, as you can see from the table of contents in the chapters 2 to 4. So 2, 3, 4, we're going to be really going deep into the evaluation methodologies. So the first one is an acid-base valuation methodology. The second one will be more a going concern valuation. So we're looking at future earnings, future revenue streams at the company will be generating. And then Chapter 4, we'll be looking at relative valuation. That is also sometimes called a market valuation, where we're going to be looking at much more ratios then really trying to determine the intrinsic value of the company. Chapter 5, I decided actually while I was writing this course over the last couple of months, it took me actually three months to write this course to, uh, to add special relation situations like mergers and acquisitions, also private equity and venture capital. So what we call the primary market, because you can evaluate companies, not just companies that are on the stock exchange, but also companies that are privately held by shareholders. Startup or it is a mature company, but that is not listed on a public stock exchange. Then we're going to discuss also IPOs and DPOs. So that's an initial public offering and direct public offerings as well. How do you value those startups that, that go out from the startup phase for a mature company phase into the IPO, into the secondary market, and are going to be sharing with you. I think I have three examples. So GoPro, Fitbit and antsy. We're gonna try to show you what were the evaluation metrics giving us before they went IPO. Also, one that is not discussed very often. And maybe you are a financial company investor that you like, companies like Wells Fargo Bank of America. You may know if you, if you read what is going on with Warren Buffett. Warren Buffett has always been with his partner Charlie Munger, a big investor into financial companies. And he has always been owning big, big portions of his portfolio in financial companies. So we're going to be discussing the special evaluation situation of banks. Because evaluating a bank, you need to use, you need to adapt your valuation methodologies versus how you evaluate non-financial companies. So that's why I decided to add this special valuation situation into the training as well so that you really become, let's say, fluids on these matters. And then as always, a conclusion with, let's say some kind of checklist. What, what kinda methodologies to use when you're looking at a venture capitalist or business angel versus private equity investor versus public equity. So public companies investor and also very important, I'm going to have a companion data sheets for this training as well, where I will be sharing a lot of information, financial information about companies that we're going to practice upon. But I will elaborate on which company is just, I think in, into three slides. So if I look back 20 years ago when I started as a value investor for those who would still not know, I'm a value investor. And when I started investing 20 years ago, I was in fact only looking at relative valuation. So that's Chapter number 4, looking at price to earnings ratio, price-to-book ratio, those kind of things. And I really was not understanding absolute valuation. So what was a discounted cashflow? What was free cash flow to the firm? Free cashflow to the equity and those kinds of things. That was for me absolutely un-understandable what it was all about. And obviously I have been practicing this and developing this. And this is also the reason why also in this training are really wanna go deep for those who already lived more advanced in investing. That you get all those valuation techniques as tools for you to make the right investment decisions. And today, in fact, when, when I invest myself or I have friends around me that also I have been teaching value investing. And I always asked myself a couple of things before buying equity. So first of all, do I understand the business I'm investing into and does the company have durable competitive advantage? It's not part of this training to look into those things for that you really need to go into the value investing cause where I'm really discussing the circle of competence. I'm discussing the mindset of an investor and discussing as well modes and how you can kind of use the term quantify a competitive advantage of accompany also the financial capability of a company to generate profits. That's something that is covered in the value investing corals where I'm speaking about return on equity, return on invested capital, return on net tangible assets. And but the core question that we really going to go deep in this training is how to estimate the intrinsic value of the company and be able to compare it with the purchase price that is being offered to you and if you have a safety margin on that. And again, this works for a private equity, for venture capital, and it works also for public equity. So we're going to really be covering only it, that's part but in depth. So I think I have like 23, 24 lessons that are really focused on that. And for you as investors to remember, I always say that theory is nice. You need to, you need to know a little bit of theory. But as Warren Buffett says, you don't need three PhD degrees to be a good investor. And, and for those who maybe had the opportunity to do some of my other courses, I always say that it's about practice is like a high-performance sports athlete. You need to make sure that you practice things. It's not just about theory. And in this training from the very beginning, after the introduction chapter, we will go and practice on for companies. And I've decided to take two companies in each separate industries. So I'd be looking at, together with you add two companies in the luxury goods area, which are Reshma and carrying. And then also the technology sector will be looking at Microsoft and Apple. So we're going to be practicing all the tasks or the methodologies that I will walk you through. Let's say in the theoretical part, we're going to apply this to those four companies and see what the outcome is and what is the interpretation I will be commenting for each of those methods are going to be using and tools. So if we look at luxury, what did I pick? Reshma and carrying? Well, originally it was one of the companies than I had bought into April last year. It's not the purpose of telling you that you should buy or sell accompany her was I'm just showing you that I bought below 57 Swiss francs. I have just sold it for 85, less than a year after, nine months after plus dividends. And they are one of the top five luxury brands in the world with a diamond companies like Kharkiv and given up as and then they have a huge range of watches and luxury pens like nor blonde and the watches Piaggio, I, WC, etc. And then carrying is known pretty well known is a French company with the brands like Gucci, if Sandra Hall, Bottega, even into Balenciaga, et cetera. So that's also a very known, very well known luxury brands. So, and luxury brands in fact, why did I pick or I invest into rushmore at the time because it was cheap and people were depressed about Reshma. And luxury brands tends to, yeah, to perform better in crisis situations. And then the other ones I think I do not need to extensively elaborate on Apple and Microsoft Admin. Most of you probably know Apple with their portfolio of products being the iPhone, the surface like Apple Pay apple Music, Apple TV, iPads, Mac, and the whole, let's say categories that are around that. Marx upside. Obviously we're speaking about Office 365, max of Azure or Windows, LinkedIn, the search engine being an Xbox as well to probably, you know, those companies. When we look at special valuation chapter, I was discussing about the bank. So the bank lecture, we're going to be specific looking at Bank of America and Wells Fargo. So because I mean, we need to look into to, let's say, banks to see and practice. Okay, how do I evaluate those banks versus all the methods that I just saw before for non-financial companies. So they're going to be, it's a small chapter at the very end of the training just before the conclusion. But I think it's important that we look at the financial statements. Have banker American was frog and we tried to evaluate those companies. Then as I mentioned, there's going to be a convenient access sheets. So for the four companies that we're going deep into, so Reshma carrying, and then Apple and Microsoft. Ai will be attaching to this training as well, an Excel file or you can see all the figure. So I pick those figures from Morningstar.com and you're going to be calculating ratios. We're going to be valuating the companies based on their cashflow and those kind of things. So I think it's good for you to practice as well. So that's why there's going to be a companion Excel file with actually what we are doing and building up during the training that you're gonna see in this Excel sheet. So that's against, again, thanks for joining this training. I hope you will be enjoying it. And let's go into Chapter number 1 into the introduction and defining value on creation. Thank you very much. 2. Defining Value: Welcome back investors, starting Chapter number one. In the introduction, we're going to be discussing and defining what value is in value creation. I mean, when I'm in this course about company valuation and the term valuation, we find the term values. I think it's important to just set the scene about what is value, where does it come from, and what do we understand in terms of value creation? So the term value in fact defines a fair return that you are giving away either for money, for services or goods. So you can imagine giving a certain service to your employer. And the expected fair return is that you are getting a salary from employee and you're expecting that salary to be fair. You can also provide me be good. Some goods to other people can be to your, to your parents and you're expecting a written into it can just be a smile or thank you. So the way how people perceive value really depends on their, let's say understanding and interpretation and their importance of how the perceived value, and they are without going to the details, different types of vantage of the functional value imagine you would be spending, you're thirsty. It's in the middle of the summer. You are in Death Valley and say you have money and you're going to spend money on buying a fresh Coke. And Coke because you are very thirsty will bring functional value to you is really trench your thirst. You have monetary value. That's really the one that is most known is like okay, if I put my money here, what do I get in return in terms of monetary value, then you have social value. I mean, potentially you are willing to pay a subscription to LinkedIn for example. Or I don't know to pay something to social media just to be connected with the people of those, of that community, can be a club, for example, as well, where there is a subscription fee that is linked to a golf club, for example, then have psychological value. This is really where you just feel better and you're able to express yourself. And sometimes we have this, if I come in and bring this back to money investments, you have philanthropists. So people that really have so much money that they want to give it for a good cause and have a societal impact. And the only return that they're expecting is read to feel better and be able to have, let's say, a good action and a positive action, a positive change in the way they are investing that money. It's not function, it's not monetary. And it's also at the moment it's, I'm not necessarily associates mob psychological. What defines value? So this, this fair return. And so when we look specifically at companies, and this works for any company that has a startup, if it is a private equity or public equity. So public equity would be companies that are quoted on the stock exchange, on the stock exchange in like New York Stock Exchange, Paris, Tokyo, etc. The and its schema mean I'm using this also in my value investing because my dividend investing costs. Well, I think what is important to understand is when you look at the company, the company, the wealth or the stock of the company is represented by the balance sheet. So we have assets on one side and liabilities on the other side. But when a company, if you would look at the company, when a company starts. You always start with capitals at the liability side, and they are in fact, as you see here on the slide, there are two kinds of, let's say capital bring us to the company which are the creators of the company, the founders, those other shareholders, they bring in equity. And I mean that equity is, comes in very often in terms of cash, but it can also be tangible assets that they bring into company, like a car or a laptop that will be part of the asset side of the balance sheet. But you also have debt-holders. That can be a bank, for example, that the company needs fresh cache, fresh money. And instead of asking an equity increase, they're going to go to the bank and ask for a loan where they're going to be. I mean, they will obviously have to serve there is a cost to serving the credit Tala, which would be the bank in this case. So depth or loss and shareholders, equity holders, they're going to bring in capital, that's a liability. And that liability will be used by the Management, by the Board of Directors and transform this into assets. And until then, here in the steps 12, we have not created any kind of value. We have just taken capital that was available, and it has been made available to the company. And then the management is making the, transforming that into some kind of assets. Where the value creation happens is indeed when the seed here on the next slide is when the assets are generating fresh cash or more cash. This is where the value creation, and obviously we're speaking about monetary value first of all, whether the value creation is happening. So we have like capital brought in by a credit owners or shareholders investing into assets, those assets We hope, and the company hopes that it will create a return so they will go and generate more cash than what has been brought in. So this is the value creation process. When we look and again, it's not the purpose of this course going into how do we measure the capability of the company to generate more cash in the future? Very often we're going to look at return on invested capital, not return on equity, because then we're missing the depth. Hola Papa, we're really looking at return on invested capital and you can express it in terms of percentages. And what is the ROIC at the company is getting from taking that capital and putting it into assets. And what is the percentage, the reason that we get on those asset generating fresh cash? And some men, the conversation you without going to the details on the next slide is really, I mean, when you're an investor, an individual, and in the next time we're going to show this also for shareholder. Mean you have you have money available at a certain point in time comes maybe through your salary or maybe you, you want in the lottery, you need to do something with that money. And remember the four types of values that are there you may have, like say social value, you're gonna pay a subscription to a club. Maybe you want to have psychological value. Just take 50% of the lottery gain and give it away to poor people. But maybe you're gone. You would like to have also monetary value. The monetary value, I mean, there is a universe of investment opportunities that are out there. So as with startups, private equity can invest into bones, state owned bonds, corporate bonds. You can invest into, into companies into a public equities as well. At the very end of the day, the challenge or the trade-off that you will need to find is between what is your expected return that those various vehicles that I'm showing on the right, negation and bank savings accounts, stocks, real estate, a 30 year US Treasury note. What is the return that they kind of let say, guarantee to you and what is the level of risk? And depending on that, you will take most probably a decision depending on your risk appetite and your expected return on the competence and also how liquid those assets in fact are. And for shareholders, it's the same. I mean, they look at shareholders are confronted with when they have capital available. What do they do to which vehicle do they allocate that capital? So it can be just keeping the earnings and waiting for expansion opportunities, buying and merge and acquisition can buy securities as well. They can invest into digital assets like building up a new e-commerce platform. And you can obviously imagine in the COVID-19 situation for those that will fit on e-commerce that probably saved their lives in terms of business. Investing into new supply chain manufacturing plant or just if there is no good capital allocation opportunity, just giving that cash back to the shareholders and make your showers or the, let's say the shareholders of the board of directors make them happy as well. And again, intrigued with the same trade-off between the risk appetite, the expected return, the liquidity, and the competence as well. So having said that, I mean, when we look at value creation and I got to be very assertive, you need to be clear that companies create value only if the yield, a return on capital. Capital comes in from the liability side of the balance sheet. If that capital exceeds the cost of capital. And to make it short, and this is the equation that you have in the red frame, is, I'm always kind of summarizing this into, I mean, when you invest your capital, you want to have a return and that return on invested capital. In order to create value for the company has to be bigger than the cost of capital. There is a cost into, let's say, using capital. And if you're able to accelerate this or to have a higher return on invested capital versus what we will discuss later on the weighted average cost of capital. So let's just call it the cost of capital. Then you are creating value. But again, the cost of capital has to be higher. Let's consider it to be that the risk-free rates. So an nearly 0 risk asset would be like a 30 year US Treasury notes with, I don't know, I think over the last year, it was at one dot 607% over 30 years period. The US government that will probably be not go bankrupt over the next three years. They will guarantee you for the next 30 years consistent yearly return of between 16 and 10, 7% of the 30 on the T3 on the 30 year bonds. And obviously the cost of capital has to be higher than the T3 and the return on invested capital has to be higher than the weighted average cost of capital. At the very end of the day, it has to be higher than inflation. And this is important. A lot of people forget, and this will be my closing slides. That's not doing anything when you have capital available and you're just leaving it at a 0% yields savings accounts, for example. This has a cost as well. And some people like to use a term. It's a hidden cost. It's not a hidden costs, but inflation you can consider the inflation is a hidden cost when you don't do anything with your money, with your capital. So this is where I'm saying, doing nothing has a cost as well. This is what the equation says. I mean, if you want to create value as a company owner or as an investor. So the ROIC has to be higher than the cost of capital, has to be higher than the risk-free rate and has to be higher than inflation. Otherwise you will be destroying value and not creating value. And this is where I think it's for you that you are clear about what value means and also how a company creates value and the importance of return on invested capital versus cost of capital versus T3. Let's consider the 330 be risk-free rates today and then also inflation. And we're going to discuss about cost of capital when we're going to be looking at discounted cash flow, free cash flow to the firm methods. And then we will be discussing what is the right level of cost of capital that we need to have depending on the industry, the type of company, the risk that comes with it. So those are kind of things that we're going to practice. So with that, wrapping up this first lecture about defining value and value creation, talk to you in the next one where we will be discussing why actually, why is there an interest in evaluating companies and analyzing companies and who is doing that? That's what we're going to be discussing in the next one. Thank you. 3. Valuating Companies: Welcome back investors. In this next lecture we're going to be discussing. So after having defined value and value creation, we're going to be looking into evaluation and why people actually evaluate companies. So when you look into the act of valuation and this why I've put like these hands is like the idea of the act of evaluation is to have as an output, a reasonable estimate of the value of an asset. And this can be done by a bank for a loan. It can be done by a real estate agency because you want to sell your house, they're going to do a valuation of your house. It's the same if you are selling your car. In terms of a secondhand, there's going to be conversation about finding the right valuation and the right value estimation of that asset. So the objective of valuation is really nice. I mean, they are true. Let's see angles to the first one is information purpose to which is typically done by third party stakeholders. You can look at financial analysts. They obviously are neutral. I mean, they don't have any purpose of buying or selling the company. They are just there like a let's call it trusted third party to give there or to share their opinion in terms of valuation of the asset they are asked for. And sometimes it's done with or without monetization. So sometimes it's a service that they've gone to or that you will be paying this third party to say, can you value my house and would like to sell it? And they're going to come up with, okay, this is a value but you need to pay me a fee for that. Then very often as well, There's a transaction purpose to it which is stronger than information purpose. This is probably linked to a future transaction, either if you're on the buy-side or the sell side of the transaction. So typically for investors, I mean, when I do valuations of companies that would like to invest into, I'm on the buy-side of it. And when typically companies, I mean, when I determined the intrinsic value and at a certain point in time I have the case with original that it crossed above 15 percent, the intrinsic value that I had determined, which is like already like 25 to 30 percent above my. So typically you have my intrinsic value. I tried to buy 2550 percent below the intrinsic value, and that is when it gets a 15 percent over validates it. And I tend very often to review my valuation assumptions and then to see, as I will be on the sell side, do I sell the company now? And this is what I was doing with the original, bought it below 57 and have solids couple of months later at 85. So and who evaluates it was given the example that you as an investor or I as an investor, I Valuator. So I will look into, okay, can I get some kind of feeling? Not just the guts feeling, but the more little bit precise feeling, scientific feeling about what is, what is the share of the company worth or what is just the company worth? And, but we are not the only ones as investors looking at valuation of companies, you're going to have investment bankers, private equity investors, business appraisers. Those would be more like the third party stakeholders, venture capitalists, business angels, family and friends as well. If you have a startup and you're asking your family to put your money into your startup, they're going to have also a view on valuation, probably going to use guts feeling, but nonetheless, foods as well. You know that in startups you always take the three Fs as being the first, let's say round of investment is family, friends and fools, but also private investor. That's little bit more what I am doing. And again, looking at the balance sheet will have on the slide is like, depending on are you sitting on the buyer side, on the sell side, the buyer would always try to buy as cheap as by to avoid overpaying for an asset while the seller side will always try to sell as high as possible and avoid understanding. And this is where we're going to have a trade-off between the two we're going to discuss later on about the Pepperdine University's study. It's very interesting report where they actually, it's like a market study about valuation professionals. And in this report and again, I will come later on on that is you see, what are the methods that people use, but also what makes it that breaks deal between a buyer and seller. So it's pretty interesting study, but I'll cover that later on. And when you look at the evaluation, if you're now if you're doing it for information purposes, are ready for transaction purposes. Typically, there's going to be variation mistakes. We need to be very clear. And I mean, you, you do not. Nobody has a perfect view and exhaustive view in terms of information to do a perfect valuation that doesn't exist. So valuation intrinsically will carry mistakes. And the first Miss, let's say mistake or uncertainty that valuation caries is when you look at we're going to be speaking about going concern valuation or income evaluation. So those are violations are looking at the future growth of the company, future streams of revenue, future streams of cash of the company. I mean, nobody has a crystal ball. I mean, just look back in 2019 who was expecting COVID-19 to hit for the spring of 2020. And so that's the kind of thing is like that's already the first thing that will generate uncertainty is that you don't have a crystal ball, nobody has a crystal ball. And when you look at what are the sources of those mistakes, or let's say sources of uncertainty. The first one is the macro economic environment. Covid-19 is a macro economical, let's say events. And there is a very interesting study. I'm not elaborating here, but if you look at Peter Lynch in 1994, your speaking at the National Press Club, I think it wasn't New York. And he was stating that, I mean, if the Fed, if the US Federal Reserve would be and they have unlimited compute capacity, they have the most brilliant guys and gals, probably in terms of economic forecasts that work for the fads. And this is not just a single person like me. I mean, those are departments and tons of people. They cannot predict more than three to six months in advance how the environments, the macroeconomic environment will look like. And nobody can that. And as I'm sitting in another training is like, if they would be able to do it's been done, markets would become predictable. The only thing that is predictable is that markets will go up and will go down when this will happen. Nobody knows that. And there are factors that are economically related, weather-related, politically related, et cetera. It's impossible to break this. I really recommend you listen to the Peter Lynch and 1994 National Press Club lecture. Actually, it's pretty fun to listen to. And he's actually right about this. And then as well there is estimation, uncertainty. And you're going to see when I'm going to walk you through also an acid-base valuation and we're going to use the adjusted method of looking or let's say reviewing existing assets and trying to adjust them. I mean, there is uncertainty on those assets. You don't have 100% certainty on those, and this will create mistakes and will require judgements. Also, I mean, if you are external to the firm, you don't have the insight information than for example, the CEO of diamond Mercedes has. And if you're not a controlling shareholder of the company, you will not be able to predict as goods because you don't know the strategic plan. There are a lot of things that will be hidden from you as an external investor. So you, you, you may have a gas and this is why also some companies, or let's say some investors preferred to less than two private equity when they can do a due diligence, for example, and have access to strategic information, the turnaround, the customers if there are some legal experts, those kind of things. And having said that, so it means that also the financial statements, maybe the term I'm using here, saying that they are wrong is maybe a strong word, but at least they will. There was always a certain level of uncertainty in the financial statements and good fade is involved. And when, when it is the external assesses the auditors, internal auditors will value the financial statements or the assets that are part of the financial statements. And then another thing was that sometimes people get confused is when we look at company evaluations versus financial analysis. So I'm always saying that financial analysis, it's something else and it's not part of this course actually, I was thinking about mixing board and I said No, I want to just do a course on company valuation and maybe it's somewhere in the future gonna do an advanced course in financial analysis. But here I just want to go on valuation and evaluation in facts on financial analysis, sorry, is the process of evaluating a business and what's the performance around that business. And so here we're going to speak about stability, solvency. We're going to look at debt to equity ratios. We're going to look at current ratios, quick ratios, those kind of things. This is part of financial analysis. This is not part of company valuation. And I'm always saying financial analysis is complimentary to valuation. But here the focus of this training is really on company valuation. And as the course and I'm in my series tablets is I'm cut off. And this is the art of company valuation because. There will be some judgement required and imagination and some skills because you do not have all the information necessary to do a perfect valuation. So this is why I am considering this to be an art as well. And again, without going too much into the detail, as I already mentioned earlier is lie in the company accompanies value is really created from long-term sustained growth in revenues and also profits. And coming back to the equation that I set up in the previous lectures like ROIC has to be higher than cost of capital, has to be higher than risk-free rate has to be higher than inflation. And again, in this course, we really, and I really have, I hope that you're going to appreciate the effort in giving you and walking you through the various tools that exist for doing company valuations and being able to estimate the fair value of the company depending if you're on the biocides, on the seller side, you want to sell an asset. What is it worth if you want to buy it, what is it worth and avoiding overpaying versus avoiding under selling the assets. And remember, we're going to specifically in the asset based valuation and there are some methodologies around and adjusted based methodologies where we're going to look into assets and actually readjust the assets. But, and it's true that some acids are easier to validate and others are going to give you a very clear example. Cash on the balance sheet is super easy to transform from cache to cache. But what about if you have stock? Stock in terms of cars and that car had a certain cost, you will not immediately transform that into cash and it will not be a one-to-one or 100% conversion rates. Look into intellectual property. How difficult is it to valuate of value an intangible assets. So those are the kind of things were always keep in mind that the higher you are if we look at US way of reporting the balance sheet. So we'll start with the current assets. So the most liquid assets on the top and the most complex ones, unless tangible ones on the bottom in the Europe is actually the other way around. If rises the other way around doesn't matter. But, but remember that some acids will be easier to value than, than others. And so yes, and the purpose for you as an investor, as I was saying, remember this balance between the buy-side and the sell side if you're on the buy-side. And this is where I'm coming back to my, let's say, can I say circle of competence is that as a value investor, I'm trying to find undervalued companies. I was giving you an example of which mode I bought below 57. It was cheap and at the very end isolates. Was it eight months later at 80 above 85 Swiss francs? That was nice, nice profit and I felt that it was overvalued. And this is the diagram I always use is like depending, I mean, you can look at this if it is on the secondary markets of public equity. We're speaking about Coca-Cola Reshma, those companies where the market is giving you a public share price. Is that the idea is finding with those methods of valuation, finding on the valid companies. And that's a primary play, a value investor, this is my primary play. I have to read balance sheets, I have to read cashflow statements, income statements, and you can look into the statistics. But value investing has been outperforming growth strategies for many, many decades in the past, and I believe it's still the case. And for you what is important is to know when to buy, when you are actually the market is giving you something. We'd say cheap price versus don't buy now because it's just too expensive. And this is the whole trend that you need to find. And you can extend this as well to venture capital and private equity. So what we call the primary market, and it's the same, it's not the market you will not have lacked the New York Stock Exchange that will give you the price that the market fields is the right value of that assets. It's actually, you're going to have the sell side, which will be a private seller, private founder of a startup that will say if you want to own 50 percent of my company, this is a price and then you will have to do your due diligence. And this is really a process that you really need to think about is okay. If I'm on the secondary market, on the primary markets, I need to do my homework. On the primary market, maybe the homework will be a little bit easier because you're going to have access to a little bit more privileged information, depending if you're going to buy a big stake in that company, it was a startup or a private equity company. On the secondary market, you will have probably to rely on publicly available information in, and actually Warren Buffett always says, I mean, the information that he uses to invest into companies is information that is publicly available. But people do not do the homework of reading the financial statements. And I know it's not easy to read a financial statement attend Kate and q. Report, but but this is how I do and I've been learning from Warren Buffett and Charlie Munger from those people is like do your homework, read those things, and you will get a feeling about it. And then you will be able to also compounded calculate the valuation of the company with that publicly available information. So with that to wrapping up this chapter about why people valuate and what is the purpose of analyzing companies and then always keep in mind, it depends if you're standing on the buy side of things, on the sell side of things. And the next chapter we will be discussing about evolution categories. So here are going to really go into an walking you through the various, let's say, tools and methods. It will be just an introduction, but they will be using. And then after we have wrapped up chapter number 1, then indeed we are really going to be walking you through each of those methods and also practice in each of those lectures. So that thank you for listening in, and I hope talked to you in the next lecture about variation categories and methods. Thank you. 4. Valuation Categories: Welcome back investors, last lecture of Chapter number 1, where we will be discussing, are ready and opening actually the box about variation categories and methods. So let me walk you through that. And then indeed, if you remember, if you look at the table of contents Chapters 2, 3, and 4, we're really going to go deep and also practicing on the four companies I mentioned earlier. So when we look at categories of valuation, so the big families or classes of valuation. In fact, some people said they are to other people said there are three. In fact, to the one is absolute valuation. And there we have two sub-categories, which is one that is really focused on the balance sheet that is called asset-based valuation. And the drawback or what is negative about asset-based valuation is that it's interesting to look at the balance sheet, but the balance sheet is not telling you anything about and you will not be evaluating the future streams of revenue, of income and even of cash that the company will probably be generating somewhere in the future. So you see already, you're looking at the value of the company today without looking at what is happening in the future. The second subcategory of absolute valuation is called going concern valuation and going concern in fact, it's an accounting term that defines financially stable company. So those are companies that will remain in business of an indefinite period of time. And this is where going continent variation comes in. And you see that the difference between acid-base and going concern is that estimates you look at the value of the company today and ongoing concern. You are looking not only at the value of the company today, but you're going to be having a perspective on what is the valuation of the company continues to operate for the next 10203100 years. And there in fact, the most used method that is known by, by series value investors is it the discounted cashflow method? But it has some shortfalls as well. And then what I considered to be the second family of valuation methodologies is really relative valuation. And in fact, when I started 20 years ago as a value investor, I did not understand absolute valuation and I started with relative valuation. So I look into price to earnings ratios, then I went into price-to-book and those kind of things. The advantage of a relative valuation versus the absolute valuation methodology is that the relative relation you can compare and benchmark companies amongst each other or within the same industry. So that's one of the advantages why people look at relative valuation and it's also easy to understand because it's just ratios. And when we look at valuation experts, I mean, for those who have done the value investing because you know that I started reading the books of Benjamin Graham and baby dots if it is The Intelligent Investor, but also security analysis. And Ben Graham, he started really explaining to me how to evaluate an asset, how to validate earnings and dividend payouts. He wasn't direct looking at the circle of competence as buffer is doing. And also one of the things if you reread or if you would read for firsthand The Intelligent Investor or security analysis. At that time. I mean, we're speaking here. Between 1931, 1950, there were no share buybacks. The companies will not use. It didn't have the mindset of buying back shares from the stock markets to generate a shareholder yield. So we didn't have that at that time. It was only after the years 2000 after the Internet bubble burst that indeed share buybacks became more popular and way of, well, not only artificially increasing price to earnings and earnings per share, but also to giving and direct return back to shareholders without being exposed to taxes. Warren Buffett's amine again, he was a mentee from Benjamin Graham, even work of Benjamin Graham. His initial position was to look at book value, so asset-based valuation. And in the 2000 shareholder letter, if you look at the shareholder letters at Berkshire Hathaway, so it's holding company is publishing. You can see that Buffet went away from the book value. So not just looking at the value of the company now, but also factoring in what are the future earnings of future streams of cash that the company will generate? So this is where he went away from the book value. And as already said, is that Buffett compared to gram is adding a strong sense of circle of competence into that as well. Peter Lynch, also person that influenced me. So I put here the equation. We're going to discuss it when we're going to be discussing the PEG ratio, price earnings growth ratio. So he has a way of defining if the peg is close to one, It's fairly valued, below it valued and otherwise above it's overvalued. And then last but not least, about them on around. I mean, he's the dean evaluation. There are some fantastic valuation books. I even YouTube videos about us whether motor neuron, you very often see and hear theirs. He's really focus a lot on free cash flow to the firm with DCF methodologies. And also he often discussed is the cost of capital, cost of equity. How come to that? The risk premium does kind of things. So it's very interesting. I mean, I've learned a lot. It was for me tougher than reading grand book buffets related books or shareholder letters or podcasts related to Buffett. Because Domo Darren starts already becoming little bit more complex, much more formulas and the other ones. But nonetheless, if you boil it down to the essence of it, you will see that the motor neuron is also very good school and is today considered the Dean of valuation or the most, let's say ranked variation expert in the world. So as I said in this, in this lecture, I'm going to be already opening up the box. What are the tools that you can expect from this training? So first, you remember, we discussed already absolute versus relative valuation. Chapters 2 and Chapter 3 we're going to be discussing absolute valuation. So Chapter 2 will be about acid-based. Absolute valuation, where we are going to be discussing market capitalization, book value, and then two subcategories of book value methods which are adjusted assets and the liquidation value. In. Again, what I said earlier, the disadvantage of acid-based absolute valuation is that you are just looking at the value of the company today, but you're not looking at what the company is worth in the future. And this is where we will be looking at going concern valuation in the family of absolute valuation methods where we're going to be discussing multiple revenue Earnings methods, but also cashflow to the firm and also Free Cash Flow to Equity. And specifically on the free cash flow to the firm you're going to be discussing a lot as well, cost of capital. So they are going to really use what asthma and Iran also is publishing about how to estimate a Jew premium, industry premium, and how to come up with a reasonable cost of capital that could become your expected return when you put your money into an asset. And without going too much into the details. But why I drew this table is because when, when you discuss with investors, that starts to become a little bit serious and not just looking at a technical graphs and if the curve is going up or down. Most of the investors I love just looking at the income statement. They look at earnings per share price to earnings, and that's basically it. They do not go beyond that. And when you look here, and this is a summary of the absolute valuation methods that we're going to be using if it is acid-base or going concern. We can already see that a lot of those methods are in fact, not using the income statement. The income is only being used for the town's revenue method of the multiple value method and discounted future earnings. But if you look at acid-base relation, we are looking at the balance sheet. If we're looking at free cash flow to the firm, Free Cash Flow to Equity. So that's the bottom part, DCF Dividend Discount among Gordon Growth Model, total shareholder yield, which includes share buybacks. We're going to be looking at cash flow statements as our main source of information. So keep that in mind. So if you already have an understanding, you're already better than 90 percent of the investors out there who just look at the income statement and look at the balance sheet and don't look at the cashflow statement. And then there's already introduced relative valuation. We are going to be discussing ratios like price to book, price to cash flow, price to earnings, price to sales, the pack Peter Lynch related ratio and then enterprise value to EBITDA to sales and revenues. So the real advantage of relative valuation is a ratio is easily understandable and the ratio is easily bunch markable. If you compare company a to company B, or vertical industry versus another vertical industry, if you take the average of the industry. So this is where relative coloration is pretty interesting. So we should not just say that relative relation is bad. I look into relative valuation as well. And for those who have done my value investing, cause you know that I'm doing a mix of absolute valuation and relative valuation when I look defining the or trying to define the intrinsic value of a company that I wanted to invest in tune. And here in this table, same, same as I showed earlier, but now in relative valuation. So the four lines above where we're going to be using a mixed between balance sheet, income statement, cash flow statement. What is important in this table is the financial health ratios and profitability ratios. Because investors, and this is something I look into as well, is looking at quick ratio, current ratio, debt to equity interest coverage, the payout ratio on dividends, for example, profitability time, looking at return on invested capital as the very most important SE, percentage. I want to understand how good the company is generating profits from the money that they get from the debtholders or equity holders are written on that tangible assets. That's something you hear very often from Warren Buffett as well, the net margin. But again, remember what I said in a previous lecture is at financial health ratios and profitability ratios are complimentary to Valuation. Financial health and profitability ratios are linked to financial analysis, not to company valuation. So again, this course is about company violation. So we will not be addressing the financial health ratios and profitability ratios Because that's about financial analysis. This course is really go deep course about valuation methodologies and how to evaluate companies. This is really what the course is about. I hope that that is clear. And with that wrapping up the last lecture of Chapter number 1. So I was really opening up the box that you see what you can expect in the chapters 2, 3, and 4. So Chapter 2 will be about acid-based absolute valuation. Chapter 3 will be about going concern absolute valuation methods. And then chapter 4 will be about relative valuation. And we're going to be discussing a lot around ratios without wrapping up this last lecture of Chapter number 1. And hope that you build tuning in into the first lecture of Chapter number 2, are we going to be starting to discuss asset-based valuation and remember practicing this on for companies each time. So it would be Apple, Microsoft on the tech side and carrying together with Reshma on the luxury side. So those are the four companies. If you remember that I want us jointed to practice all the time during this course because it's not just about theory. Thank you very much. And 29 in the next lecture. Thank you. 5. Asset Based Valuation - Market capitalization: Welcome back investors, starting Chapter number 2. And if you remember, we were discussing in the introduction. So Chapter number 2 will be about acid-base valuation, which is one of the two, Let's say families of absolute valuation. And first as an, as an intro about acid-base variation. So we will be looking at market cap and then a specific scenario of market capitalists character market cap value. And then we're gonna go deeper into the book value methodology, including so the book value method by itself, but then also looking at adjusted assets method and liquidation value method, which are in fact two, let's say SAP Methods of the book value method. So let's start with the base variation. Let's start with market capitalization and the specific scenario of cash to market camp. So actually the market and we're speaking here about public equity. So companies are quoted on stock exchanges very often you hear in the press that, for example, over the last months, years you were hearing that Apple or Microsoft, we're crossing the trillion market capitalization. And in fact, market capitalization is an an absolute valuation. Some people would say it's based on the assets, yes, but the price is determined by the market. It's not being determined by the balance sheet. So normally, when we define market capitalization really refers to the total value of a company's shares of stock. And it's in fact, component are calculated by multiplying the number of outstanding shares. I like to use a diluted one and multiplying by the current price that the market is giving you. And was interesting about the market cap is that to some extent it shows a public opinion about a company, how hot they are on the company or not. Over the last couple of weeks, you may have heard about Tesla. We're very hot. And even with market capitalizations that were beyond sometimes some of other automotive manufacturers, automobile manufacturers. And when we speak about market cap, so we typically discuss about five, let's say, kinds of categories of market caps. You have really the mega cap that's considered to be above 200 billion US dollar. And the liquidity as a result of demand and offer on the market is very, very high. And also there is a lot of analysts, a lot of information related to the company that has been covered, if it is by analyst or just by journalists over the press. Large caps, we are between 10 billion and two hundred billion. Liquidity is also very high and also the coverage that those large-cap, large-cap companies have is also very high. Then we have mid-cap that's already smaller. The West became our 2 billion to 10 billion. So that's kind of what the market says, what the company is worth. So there the liquidity is good. But you're going to see that the demand for those stocks is already going a little bit down compared to being a cup and launch camps and also the information available around the company is still okay, is really good. But you're going to see already less analysts covering those companies. And I've seen sometimes. Maybe 2345 maximum analysts were covering those companies. Then small cap, we're speaking about 300 million to 2 billion. So their liquidity is still pretty okay, but already the information become slimmer and then micro caps, that's really smaller companies like 50 million to 300 million, the liquidity very often is pretty low. And also the company information that is available is also poor normally. So and we're gonna use this red frame throughout the course. So here I'm giving you the formula how to calculate market capitalization is pretty easy. You take the number of diluted shares, outstanding shares. So you remember in previous courses were discussing diluted weighted average of shares outstanding. And you multiply it by the current market price, it by the current share price, this will give you the market cap. And if we practice this on our four companies, remember we're going to through, through the whole course, practice this and bring this back to wish more carrying from a luxury perspective. And then Apple, Microsoft for the tech industry. So if you look at the number of outstanding shares, you have the table here at that someone who was doing the training, you see the current share price was €64, 567 euros for carrying. And then on US dollars you had 1182 to three. So you see at the market cap shows you that Reshma and carrying with 37 billion and seventy one billion Euros, they are considered large Capstone. That's true. Those are really big companies nonetheless. Then you see how Apple and mark off valued by the market. So they were at that time at 2 trillion and Microsoft also at one dot 7 trillion. So there we were typically in the category of the mega caps. And what I mean, how can we interpret this? And you see on the right-hand side, there is my, what I call my comments frame next to the formula. And what does it mean? Per se? The market cap does not tell you too much. It the only thing that it tells you is that probably the company is It's a big company, but it doesn't give you any, let's say, interpretation of the fundamentals or the company is worth to some extent, it can become pretty emotional. And specifically, if we look at the relative valuation, wish more versus carrying, what does it mean? 71 billion versus 37, or one dot 7 trillion of Microsoft versus 23 than of Apple. So I mean, I do not look at that because for me it's like okay, on depending on the number of outstanding shares and not the current share price, it gives you some kind of absolute valuation. But for me it doesn't give me the sense if it is overvalued to take a decision of buying or selling the company. And then when we discussed about market cap, There's one thing on the last where I do use market cap and I'm using this specifically one, markets tend to be depressed. And remember, if you did the value investing course that's in average once every two years is going to be market correction of Milan 10 percent. And once every four to five years in average since 150 years there's going to be a bad market. So that's a more than 20 percent correction. And one of the tests I like to use in such situations is and it's not an absolute valuation on it's a relatively new one. But I'm using the market cap as an absolute valuation and I'm bringing this back to cash so. And what happens? Why is this important? It's a quick evaluation to see if the market is super depressed or not on the companies I potentially would like to invest into. And what is sometimes interesting, and I've seen this, for example, in the automotive industry and a half is actually, I think for Diablo or cities, which is one of the equities I still holds, where in fact the cash to market cap, the market was valuing very close the assets of the company, just the cash assets of the company. So all the rest they were considering it nearly at Scrabble 0 value, which is logical because if you're an automotive company, you have stocks in the sensor, you have stocks of cars that have been pre-produced, probably going to have raw material. You probably have some intellectual property that the company carries since many years related to engineering and development on R&D that you have been doing. So it's very, very fun when the markets are depressed just to do this quick valuation of cash to market cap. And if you look at the formula, so you take the cash or cash equivalents in the balance sheet. So on the asset side, and you divide it by the market cap. And this is a very quick one. And it can happen that even sometimes the market is valuing the company below its cash position. Remember that I'm always saying one test is not enough, so we need to understand better why is this happening is purely because the market is depressed? Or are there other reasons why the market is devaluating at such a high level, the company. But it's very interesting and sometimes actually funny to see that when the cash to market cap, when they are getting closer to one or 2, 100% that actually the market is the press about the company. But again, do more than one task. Again, I mean, go to my value investing cores and we're going to discuss those evaluation tests to really understand what is the story behind the company. And if you practice the cash market cap on our four companies that we're going to be, let's say exercising, practicing throughout the whole course. So we're looking at original carrying and Apple and Microsoft. So see that the companies have certain amount can look at the red frame for Richmond carrying. So they have between eight billion and two billion of cash and cash equivalence. And if we bring this to the market cap that we have calculated previously, well, you see that, for example, on Reshma and that was at the time that I was buying, rational, that the market was actually evaluating the company versus the cache. So the cache to market capitalisation, that 23 percent, which is in fact very high ratio, which could show that something is going on in the company. And what did I do with this quick test? I looked into it and I found out that in fact, Reshma was undervalued by the market. And at that time I bought it around 50, 57, 56. And in the meantime, I've sold it at more than 85. Within a couple of months. And you see, for example, if you compare the cash, the market cap of rational at 23 percent versus carrying versus Apple versus Microsoft. Well, it looks like that carrying has a very small cash, the market capitalization. So it could show that indeed the market is kind of valuating, are evaluating, carrying as the cash to market cap is pretty low and the same for Apple and Microsoft. One of the things that is important as well in the interpretation of the cash to market cap. And you, as an investor, you need to understand this is it can happen. And I'm going to use the example of reasonable. It can happen that the company, as, as you do as an investor, there is no good capital allocation opportunity out there. And you're going to be pining up cash and the company is going to be piling up cash because they are preparing an acquisition, for example. And that's the kind of thing that can happen. It can be also the other way around. That's, um, do not know the details for carrying out. I've never analyzed in detail carrying. But carrying, for example, they have a pretty low cached in market cap, which is three dots, 24 percent. Maybe they just did an acquisition and they use cash to buy another company and integrate and merge the company into the carrying group. So that's always the kind of thing where I'm saying one test is not enough. One test is not telling you the total story. But if there would not be a preparation of an acquisition or a, the idea of, let's say of just having board and your company where the camera's going, going low, it can happen that sometimes a company has sold, has divested from a pod, from a subsidiary, that's suddenly the cache is growing as well. Need to always practice your eye and understands why suddenly the cash position is so high is because there is no good capital allocation opportunity, is it just because they did a divestiture? They have now a lot of cash available and they still do not know exactly what to do with it. On the other hand, on the cached in market cap is low and the cash in general is low. Maybe it means that they just bought a company and they have other capital allocation opportunities to invest into supply chains, et cetera. What they say, it doesn't make sense to have so much cash. Let's say liquid available in our balance sheets. So there's really what you need to think about, the cash to market cap. Some, some investors, when they look at cash versus the total balance sheet or sometimes a cache to market cap. There is some kind of, I would not say rule but but kind of a rule, an agreement on the market that it's always good for company to have like 10 percent of its assets that are in fact very liquid in the sense of being cash or cash equivalents. For me, I mean, I didn't do not necessarily look into that. What is more important for me is, for example, looking at the amount of depth that the company carries versus the equity and also versus the cash. So that's a kind of thing I prefer to look into. So that's wrapping up this first lecture of Chapter number 2, which was indeed about market capitalization and the specific scenario of cash to a market cap. And the next one, we're going to really go deep nets will be actually a longer lecture about book value and then read the very long lecture, but adjusted acids where we're going to play with some accounting rules and that you understand how to even re-evaluate the balance sheet from a company so that thank you for your attention. 6. Asset Based Valuation - Book value: Well, I can make investors in this lecture number 2 of Chapter number 2. So we are still in the absolute valuation methodology is and currently we are looking into asset-based valuation. So that's in most of the cases, looking at the assets that are on the balance sheet and trying to understand what the company is worth. And a very important methods is the book value method that we're going to be now discussing. And then we will have two supplemental lecture specifically on, I will call it derivatives, but really like subcategories of the book value method where we are going to be going to show you how to adjust the balance sheet and also to look at scrap value, liquidation value of the company. But let's start for us with the book value method. So again, just to refresh your mind, I think what is important that you keep in mind is that when we look at acid-base valuations, we are not looking at the future streams of revenue and of cash that the company would be generating with this asset, with its assets. And that's something normally when you, when you invest in to accompany you are not buying for what it is worth today, but you're buying it for the future outlook and the future streams of revenue and earnings that you're going to get from the assets that you're buying today. Nonetheless, book value is a very interesting methods to see specifically. I mean, when you are not sure what the company is worth. And this works also for growth companies and even for startups where probably the book value is very low. And in fact, investors are just buying promises of future streams of revenue. And this is where you're going to see that, I mean, that book value is interesting and my style of investing is I like to buy large-cap, mega cap companies that generate passive revenues of streams of revenue. That can be a cash dividends, dividends, or share buybacks, those kind of things. But at the same time when the companies on the valid by 25 to 30 percent. So I have a safety margin on it and I do use the book value in fact. And what is the book value? Let's go 1 second into two. Remember we are an acid-base violation. So I looking at the current balance sheet of the company, we are not looking at the future outlook of revenue and, and casual earnings coming into the company. So the book value has been by value investors specifically a method that has been used for a lot of decades to assess the stock. In fact, there's a devaluation of the stock or the evaluation of a single share of a company. And grandma has been teaching students, then when stocks trade below their book value, on the value two, it can be a very attractive investment opportunity, specifically when there is a high margin of safety. And about that's also considering that probably the risk is low. What is important, as already mentioned, is you need to use the book value method with caution because you're looking at the current worth of the company. You are not looking at what will be the future and some assumptions about future earnings. So just keep that in mind. It's important this is why we are starting with acid-base valuation. And so when we look at this, Let's say simplistic view of a balance sheet. So you have the capital bring us on the right-hand side. So on the liability side you have credit totals that would be typically lepton number b. Then you have the equity holders are shareholders, they bringing capital or assets. It can be not always cash, but let's consider the bringing capital and those are transformed into assets. And those assets, we hope they're going to produce a return on investment in fact. And the book value is pretty easy. It's the book value. Basically, you take the assets, you subtract the liabilities and what remains, what is the equity? Is in fact, your book value of the company. When you want to have a book value per share, you just take that book value. So the equity that remains when you remove the liabilities from the assets and you divide by the number of shares outstanding. Remember, I tend to use diluted weighted average number of shares outstanding. So the diluted wash OSU because it's always a little bit higher because there are some liabilities of printing new shares for the company. And this is giving the book value per share. And can I do with this book value per share? Can I compare the book value versus what the market is giving me? Yes, that's the intention. It happens that sometimes the book value is very, very close to what the market is giving in terms of price. And so the book value, or the book value per share is an absolute methodologies and acid-based absolute valuation method. But typically, if it is, let's evaluate vessel but also myself, I bring in a relative calculation formula, which is a price to book ratio. And it's a relative valuation where I use the current market price, the current share price that the market is giving me and I divide it, the book value that I have just calculated per share. And typically for very investors as follows, I have done my van invest in cause. You may remember that I like to look into companies that have a price to book value that is below three or even sometimes below 15. And this can be interesting because it can tell you that the market is under valuing the company. But again, remember repeating myself, one single test is not enough. You need to do multiple tasks to get a consistent story. It's not because one ratio is shown in green that you should put all your money into that company. So I said it can reflect perception by the market and the market is being depressed. And when coming back to so we said that book value and book value per share absolute valuation methodologies. So acid-base absolute valuation. So it's equity divided by the number of shares outstanding, if possible, to loot it for the book value per share. And then the relative valuation. And we are going to discuss it in Chapter 4, the price to book ratio. Then indeed we're going to use a current market share price divided by the book value per share and asset. If the value is below three or below 15, it could show an undervaluation by the company. If we bring this again, I want you to practice your eye on this. If we bring this to the four companies that we're going to consistently, consistently, sorry. Look through the course like Reshma carrying Apple and Microsoft. So here I'm indeed estimating in the second red framed the book value per share. So remember you have, as always the FX so that we have the formulas that we just have learns and the book value per share. You see that for example, for really small the book value is 34 carrying it's 82. For Apple is freedom at 85, and for myself it's 15 dot 63. And the current share price, you see the current share price for both European companies, Richmond carrying it's in euros or 64 and something 567 and FAP landmarks is in US dollars at the moment I was preparing the course. So you can already see what is now interesting to compare is what is the acid-base valuation or absolute duration methodology? So the book value per share telling me versus how the market is pricing the company. And you see, for example, that at that time when I was doing the course, that Reshma was in fact at 2.5th, 15, which is a pretty low price to book value. Remember, book values are relative valuation, but it uses an absolute asset-based valuation to estimate the book value of the company and the book value per share of the company. You see that, for example, Apple, just based on the balance sheet. So remember in absolute valuation, asset-based valuation methodologies, we are not looking at the promise of future earnings and future revenues were just looking at the company what it is worth today, we see that the Apple, for example, with a price-to-book of 384, it probably means that people have very high expectations on revenues for the next probably 30, 40, 50 years. And this is why this is giving me an indication that probably the, the price of Apple is overvalued being at a ratio at the Pb 2 of 30, 84. And so asset when the price to book amongst many of the tests that you have to do when the price-to-book is below three or below 15. There may be something going on with the company and maybe the market is giving you the company at a cheap price. But asset, one test is not enough. You need to do more tests, more. Look at more, let's say valuation methods. More ratios. Go to the value investing cause look at the mode of the company, what customers are saying about the company. But remember, one ratio is not enough. So a couple of supplemental comments on the book value. And you're going to see in the next lecture we are going to be practicing this one. We're going to really go into the balance sheet on the asset side of the balance sheet and trying to reevaluate some of those assets, or at least to understand and do some judgments if the assets are correctly valued or not. So a book values, remember the book that is difference from assets versus liabilities. So what remains is the equity. That's imagine you would have a very high intangible assets. Could be goodwill. Goodwill is an intangible asset which is a premium of an acquisition, for example, it has to be carried. It can also be intellectual property, for example, Patents, those kind of things. So the book value is something that you also need to look at. One of the tasks that I like to do is what I call intangible overload of the balance sheet. I like to look at insights, the balance sheet and specifically on the asset side, how many, how many tangible assets are there in the company versus intangible assets? If you have a company that has 20% of its assets, which are only tangible assets, and 80 percent not intangible assets. Well, you need to understand what is the story behind it. Why is this company carrying so much intangible assets? There is a reason to that. That's something I try to be mindful about because I do not like honestly, companies that carry a lot of intangible assets. Because very often if you look at the accounting rules, so there has to be a yearly impairment testing that has to be done. So the company with the external auditor, they have to review from one year to the other if the value of an intangible asset has changed and potentially write it down so there will be hit by an impairment on impairment loss on intangible asset. And that's something that will happen on tangible assets. So that's why, for example, that's my style. I'm not telling you what your investment style should be. By my investment style is really too. I prefer to have companies that have maybe 80% of the assets, which are tangible assets. And then maybe let's say 10, 20% of the company that has intangible assets and intellectual property patents, those kind of things. But I didn't know like the other way around. And very often in startups are in growth companies, you have more the intangible asset that weighs more than the tangible asset. So we that wrapping up the second lecture of Chapter number 2, so we are still in asset-based valuation, which is part of the absolute violation, a family of methods. And in the next one, the next lecture will be a long one as we're going to be discussing how we can review our book value by looking at the assets that the company carries in the balance sheet and then adjusting those assets. And this will be pretty interesting, and that's definitely something I use specifically women as I invest really in very large brands. But we're going to discuss in the next lecture. So hope to see you there. Thank you very much. 7. Asset Based Valuation - Adjusted Asset Method: A comeback investors. In this next lecture, we will be actually reviewing the book value method that we have been introducing in the previous lecture and talking about or is called adjusted asset method, also adjusted book value or sometimes you hear the term also adjusted net assets method. So assets, the adjusted asset method has as a purpose to not to stick with the value that it has been reported in the balance sheet, but trying to verify if some assets can or need to be adapted and the value changed on those assets, this is why it's called modified book value adjusted net asset, or just a book value. And remember that the idea when you read a balance sheet is that the value that is represented should represent to some extent the fair value. And there is room for interpretation. So sometimes you're going to have people who will value assets in a different way. What is represented in the balance sheet, for example. And the information where you can base that kind of judgments, you will need to look and read into financial statements. So like the 10 K and 10 Q reports of this USAA, as you see, listed companies, management comments can give you a clue about how the fabrication has been done, but also external sources. Specifically, if you're in private equity and building is part of the assets of the company. And what is the building word and how is that represented in terms of fair value in the balance sheet? And the reason why we adjust the assets. There are a couple of reasons, but the main one why I look into adjusting assets is that you may have assets that are carried at cost in the balance sheet and are not carried at what is called fair market value. And, and by carrying at cost, you already understand that the value of that asset is undervalued what it is really versus what is really worth. And this would change obviously the book value. So this will increase the book value and you really reassessing and adjusting that asset. And also sometimes you need to adjust because you there may be differences between accounting standards as well. So what can be adjusted in fact, so the things that can be adjusted, either assets and, but also liabilities, I mean assets. They already gave you the example like property, plant and equipment. Very often those acids are carried at cost and they require a review. But liabilities as well, imagine that the company cares liability related adeno to pay roll or to pensions. And that may change over time. Unfortunately, if people die or employees, let's say, leave the company, then the liability actually evaporates. You may have the same. No more specifically a bankruptcy scenario when the company is going bankrupt or fast for Chapter 11, for example. And the assets have to be, let's say, US and transformed to pay back debts. But sometimes there is not enough. And sometimes to avoid bankruptcy, some creditors or credit holders are willing to restructure the depths of it is called debt restructuring. And by that potentially also the liability side has to be adjusted. So the only common are going to make her is real and my personal method. And I'm going to be explaining and showing to you how we do this on the phone company. So Reshma, carrying max of an apple, I do exclusively look at assets. I don't look at liabilities when I do this adjusted acid or just book value method. And I always start with the biggest assets, with the largest assets. And I'm looking at what is called materiality. Materiality, if you don't know that is a term that is used in auditing and material effects. The material impacts are effects that really have an impact on the substance of a figure. Typically in the auditing world, we speak about five to 10 percent range, which is a threshold of materiality. And typically, for example, if an amount is below 5%, you're going to say that it's immaterial. And when it is above 10 percent, we're going to set this has a substantial impact on the figure. And by that, actually, it becomes materials, so it becomes important. And between five and 10, you may decide on if that requires judgment of his material or immaterial. In other companies, for example, the auditors and some of you may know that I'm sitting at the board of directors of a couple of organizations, then in fact, the material, that materiality threshold is defined in monetary value every year and discuss with the auditors and validate it with the auditor. So it is above that threshold is considered. Material has to be discussed, and what is below that is not substantial. But before we go into the adjusted book value method or just add acid methods here, unfortunately, or maybe fortunately, we will not have the choice. And we will have to bring in accounting principles. And you, as an investor, there is a minimum of accounting that you need to know and obey this introducing here the two main norms, That's standards that are being used in accounting. So the first one is IFRS, which is International Financial Reporting Standards that is used in 120 countries. And counting there more and more adopting IFRS, IFRS, sorry. Then you have US gap, which is the US generally accepted accounting principles that are established by the FASB, the Financial Accounting Standards Board. While the IFRS is established or developed, the standards are developed by the International Accounting Standards Board. So as you already see that I have read it applies internationally to most of the countries in Europe, in Asia, and also South America. And US gap is mostly applied only for US companies. And there are some differences. And again, I'm gonna walk you through the most important ones in terms of rules and principles I have for Azure Cosmos, judgment, interpretation while you ask, give us more rule-based, and actually you see a little bit the same. And phenomena in legal aspects that US applies common law while Europe applies more codifications which requires interpretation of the code. While in the US, it's little bit more, let's say shop in terms of those rules. But if the rule is not known, then how to deal with that. One of the important matters that we're going to discuss in the next slide when looking at our four companies. So carrying Reshma marks of an apple is that the balance sheets are presented in a different way. In IFRS, the balance sheet starts with the non-current or long-term assets and non-current liabilities. While in US gap, you always start with the current assets, current liabilities that's within the next 12 months. And then in the balance sheet you're going to see the non-current assets and non-current liabilities. So the order of liquidity is in fact inversed. You go from the least liquids to the most liquids in IFRS and US GAAP, you go from the most liquid to the last liquid. Asset or liability. Inventory methods is not necessarily important, but there is a difference that IFRS allows last in first out, while you ask gap only allows first-in-first-out. There are some aspects related to fair value reevaluations. And I for us, for example, you you may specifically, if we look at property plan and equipment, you may decide to assess what the fair value of an asset is, but you are allowed to go up and down in the reassessment of it. And you ask gap, revaluation is prohibited with the exception of marketable securities. And we're going to discuss that later on when we're going to be discussing about cash and cash equivalents and the level 123 input data for evaluating the fair value or mark-to-market value of those, let's say securities impairment losses. There are some differences between the two. In IFRS, you can reverse the impairment loss. We on US GAAP, you are not allowed on fixed assets as well. And US gap most the long lived assets, like buildings, furniture, and equipment will be carried at cost with depreciation associated to it. And you're going to see that specifically on land. Land is never depreciate it. What in IFRS you see that the fixed assets and they are initially valid at cost, but it could be revalued up and down to market value. And this obviously you can imagine for building, the company owns a building. What is a fair value of a building that you have bought 50 years ago? Well, here you see a difference that you need to read in IFRS what the company has been doing, how are they mocking the building at fair value? So market value or not, in US gap, the billing will be carried at cost plus depreciation. So also very important difference is revenue. So the revenue follows the cause. And IFRS, when you ask gap year, we use the completed contract method. So for example, imagine. Services contract. The services contract will be executed over 12 month periods. In IFRS, you can actually recognise revenue every month and the cost that is associated to it. What in US gap, you will probably use more a deferred revenue methodology. So and then extraordinary items. So in IFRS, you are not allowed to have extraordinary items. And I do remember Warren Buffett always saying that people tends to, or some COs, tend to trick the analysts because they put extraordinary costs outside of the income statement just to dress up the figures. Why? So this is something I do like is that there are no extraordinary items. The items are there. That's it. The cost is there, that's it. And in US gap, it is allowed in, in fact to have extraordinary items. So if I take the example of a company, so Reshma carrying, remember those are European companies, Swiss and French companies. You see that here by looking at the consolidated balance sheets, they do carry. Indeed, you see that it's an IFRS reporting that the US you see that the long-term assets, the non-current assets come first. So that's very illiquid, like property, plant, and equipment, that's a very illiquid assets. While the current assets, even cash, comes at the very end of the asset side, and it's the same for currents. This is typical IFRS. You start with non-current assets and you go to current assets on you. You have the same for the liability side of things. You have equity first, then comes non-current liabilities with current liability. So UK, you see that this follows IFRS than that. When you look at Apple and Microsoft, you see it's the other way around. They start with a very liquid current assets and then going to the non-current assets. And then from liability side, again, the order is changed. They go with the current liabilities, the long term liabilities, which are called non-current liabilities. And then indeed the end of the liability side of the balance sheet with the shareholders equity. And in the next lectures. So when we will be discussing adjacent acid method or modified book value, we're going to be looking at this one I'm highlighting here. And we're going to be practicing on re-evaluating or potentially adjusting financial instruments that are carrying the balance sheet, property plan and equipment, but also the intangible assets. And I'm going to be, for each of those, are going to walk you through a specific examples on that. Remember the idea of a juice adjusting the book value. Remember that the book value, it tells you what the company is worth or what the balance sheet of the company actually reflect. But remember that the book value is not looking at the future earnings and future cash-flow at the future, let's say streams of revenue that the currently existing assets will generate. So we're going to have two cases. We're going to be discussing financial instruments, property plan and equipment intangible assets. On the left-hand side, you're going to have even asked that is undervalued and you are adjusting the value. So you're increasing the value of that asset you're going to experience over. So in the case of the undervaluation, you are going to be. And adjusting that asset. So increasing the value of the asset and that will reflect obviously by it will increase the equity so the book value of the company on the right-hand side, if the asset is overvalued and the adjustment process makes that the asset has to be re-evaluated downwards. And then indeed, we are going to be reducing the book value and the equity value of the company, obviously. So you see how just by adjusting a couple of assets, we're going to see the book value increase or decrease depending on the situation we're going to be in. And in order to practice coming back to our four companies. You see here that I've taken from Morningstar.com, which is a site I use a lot. The balance sheet and what I'm showing you in the balance sheet is I've taken the most important. So remember the materiality, materiality threshold. So I'm using the most important assets if they are current or non-current. And they're going to be looking at those assets and potential reevaluating those assets. And when we see, when I transform the balance sheet through here, just look that with, let's say, less than ten lines. I have in most of the cases between 96 percent from Microsoft and 98% of all the assets of the balance sheet directly reflected in those eight, those eight lines if this current three current assets and let's say around half a dose and non-current assets. And if you look at the materiality on the three that we're going to be practicing. If you look at cash, cash equivalence and short-term investments, they represent actually a very big portion of the asset side of the balance sheet depending on the company. When you look at gross property, plant and equipment, and even with or without depreciation, the, it's very important you see that, for example, flourish more. So 32000, 46 percent even minus surface and that's 20 percent. So one out of $5 carried in the balance sheet, in the asset side of the balance sheet is linked to PPE. So property, plant and equipment, you see that for carrying it's even one out of four. So 32 dot 78 minus 749 depreciation, that's around 25. And you see that from Microsoft as well. They carry 17% of their assets in PPE. Then you have the intangibles and other that are not goodwill related. So goodwill remember, it's the premium that the company had to overpay for an acquisition. This is typically carried by accountants in the asset side of the balance sheet as an intangible asset. So that's, that's what is called goodwill. So you see that most of the companies here wish more carrying Apple and Microsoft, they do carry a little bit more than 10 percent of goodwill, but we will not be adjusting goodwill. The one that we will be adjusting all the intangibles like brands, Intellectual Property Trademarks. And here you see that they are very big differences carrying, carries nearly 30 percent of the assets in the balance sheet are linked to intangibles that are not good. We'll relate it. And Reshma only 11 percent. Microsoft only carries 6% of intangibles in the balance sheet, and Apple in fact carry 0. So they do not carry any intangible. That is not good. We'll relate it. And again, you see that we are between 96 percent and 97 percent with those couple of categories we're going to be looking into. Indeed, we will cover the most important material assets, so valuable assets in the balance sheet. So remember the materiality threshold. So in the next lecture we are going to be stopping here. The next lecture we are going to be looking at financial instruments and the fair value measurement of those financial instruments. So with that, I hope to be tuning in into the next lecture. Thank you. 8. Asset Based Valuation - Adjusted Asset Examples: All right, Investors, welcome back. In this lecture, we're going to be going really deep into the re-evaluation of the reassessment of a couple of assets. We were going to be doing three, so we're going to start with financial instruments and then we're going to go into PPE, so property, plant and equipment, and then also we're going to be looking at brand value. And I will show you how I use the value of global brands of intellectual property, trademark patents to readjust the book value when I invest into companies. But let's start first with financial instruments. And the fair value measurement of those financial instruments. What you have here as well, what I did not mention the previous lecture, you see that as we are looking at IFRS, I've highlighted the couple of, let say standards that are going to be looking into. So for financial instruments were looking at IFRS standard number nine and fair value measurement is IFRS 13. And you have on the left-hand side EAS, that's international accounting standards. So actually EAS, it's an older norm than IFRS. Ifrs is little bit more, let's say up to date, but both, let's say linked together. So we will be starting asset with financial instruments. So, financial instruments, so remember that financial instruments is a subcategory of cash and cash equivalents. So you remember on the current assets, we were looking even a couple of lectures ago at the cash to market cap. But very often accompany does not carry cash on bank, but they really would like to have as well some kind of passive return. So they're going to be probably be investing into maybe corporate obligations, government owns obligations, or even sometimes securities. And so remember what we are looking here is if financial instruments can be overvalued or undervalued. And remember us also you see in this very dramatic and simplified balance sheet that in case of an undervaluation, we may need to correct the value up, which then has a positive effect on the book value. It's the other way around. If the asset is overvalued and we need to do an undervaluation of the asset, then these would have a negative effect on the book value. So when we look at financial instruments and in January we were speaking about fair value and fair value accounting. It's also called mark to market. And when you look specifically at cash equivalents, it's going to have different types of, let's say, cash equivalence. And they will, they will be typically on the asset side of the balance sheets. And what you want to know is, how are they changing from one period to the other? And here it's where it becomes a little bit complex and they're going to be walking you through. In fact, the International Accounting Standards say, and here looking specifically at IFRS and GAAP, that's basically, and now in US gap we have three levels of, let's say, inputs that can be used to determine the fair valuation, the mark-to-market of an asset you have level one, which is pretty straightforward, is imagine the company holds a certain amount of shares of a publicly listed company. Imagine that Microsoft owns stock of, I have no clue. Walmart. And Walmart is listed on the New York Stock Exchange. It's very easy to mark that assets to markets and to estimate the fair value. Because the accounting standard says We're just use the price that the market is giving you. So if max, it has a million shares of Walmart and one share of Walmart is worth 100 at the moment that the financial reporting is done. At the moment the valuation is done, you will just multiply 1 million chairs by the streets price, that's Mr. Market is giving us a multiplying by 100. That's pretty easy level one little room for interpretation, but you're going to see that there is nonetheless room for interpretation. Level two, that's when you have assets where you will get directly price from the market on them, but you will need to look into observable information. So similar items that are on the market. So here typically we are looking at private equity multiples or similar buildings, for example, downtown that will be level to absorb information. And you have level 3 defibrillation, let's say accounting. You're going to have level three measurements which are absolutely on observable. So those are very illiquid assets and they are highly subjective on how the bill will be valued. So the impact as set, remember that depending on how those assets are valued, it may push up, push down the book value and the worth of the equity part of the balance sheet. And I'm going to give you a couple of examples because I want to trigger off your understanding of this. So imagine, we were speaking about Walmarts and imagine Marx would have a million shares of Walmart's. Imagine that the current share price is 100. But suddenly there is a bear market as what happened in March, April 2020, the market loses 50%. So those 100s, so the share price of one Walmart stock at 100 is going down to 50. So 1101 measurements fair value requires that that asset is written, is reviewed, and is now worth half of what was it what it was worth couple of weeks ago. So here you see already that even on the level 1 that markets prices go up and down, this would have an impact on the book value of a company. Something that I personally like to look into is when the company carries a lot of Level 3 cash equivalents. And because cash equivalents of various level 3 cash equivalents are very difficult to, let's say, objectively value. So this will be a highly subjective, let's say calculation. And this is where I will be reading the financial statement to understand specifically if it is. And here you're going to see differences when those are audited figures, the auditors will provide an opinion about valuation if it's level 1, 2, 3 assets. If it is unaudited figures, you never know what the CEO and the board of directors with the CFO could potentially value of those assets. So you need just to be mindful about that. And the example I'm giving you is some of you may remember the financial crisis, the subprime crisis. I happens in 2008 with Lehman Brothers going bankrupt. And what is interesting is that for those who remember what subproblems were and those credit default swaps and collateralized debt obligation does kind of things. So the CDOs, CDS's, those assets that some companies had in their balance sheet as cash equivalents. They were in fact categorized as Level 1. And imagine what is happening. I mean, before the crisis, everybody was happy about those CDOs. And they were, I mean, the market was giving a prize to them. But suddenly, when the market started to guess, to get very depressed about the real value of the CDOs. They went from level 1 assets to level 2, actually even two, level three because nobody was able, despite that the rating agencies had given some evaluation or let's say a credit related ranking to it. Nobody was really knowing what are my CDOs worth. So what is happening to my balance sheet and to the asset side of my balance sheets. Civically, if I'm carrying if I would have been accompany carrying a lot of those CDOs. So when you're asked mock them to market, you're going to say, I have no clue because the market is so depressed, I didn't know how to value them. So this is where you see that even sometimes, let's say assets that are considered level one assets they could move during a crisis situation to level three assets. And let's go into Reshma carrying an app landmarks of n. And let's see where they carry those financial instruments. So here you see, for example, remember Reshma carrying of being European companies, they carry this on the IFRS norms. So we're going to have the current assets that come after the non-current or long-term assets. And you see at the half some trade receivables, derivatives, financials, financial assets had at fair value. And then also they have cash at bank or on hands, and you have the same on carrying side. They have other current financial assets, but also cash and cash equivalents. And if you look at Apple and Microsoft, remember here we're looking at US gap reporting. So we start first with current assets versus non-current assets. So you see that the carrier certain amount of cash equivalents of cash and cash equivalent to that would be kinda tans and on hand and cash at bank as well. And you're going to see that. We're going to see also marketable securities on Apple's side, our, it's called short-term investments with Microsoft. And the carry also some other current assets. But it's interesting to see is for example, the Apple carries 100 billion of marketable securities, which are considered to be non-current assets. So probably, when I read this per default, I would consider that those are probably assets that have a more than 12 months, let's say exploration. This is why they're carried at non-current oil. It in the category of non-current assets. And year is really and you see it us gathering what I like about the apple and March of report. They really, really go much deeper into the explanation how those 52 billion or 100 billion, let's say split it up. And here you see if we start on the left-hand side of the apple, we clearly see that there is a cost associated to it to those assets. We have unrealized gains. So that means that the value of the assets between the moment has been bought and what is the moment it's reported has gone up. You have also unrealized losses. That's when the asset has lost value. So it's worth less than what it costs of the company. And then you have in the fourth column, the fair value of valuation or measurement. And then you have the UC on, again, cash and cash equivalents, current market or securities and non-current macular securities. And you look now on the left-hand side, you remember we were introducing the content of level one, level two, level three assets, and level 1. That's typically you look at the market. The market is giving you a price for those assets. So you see on the upper side they carry 2 billion of money market funds. And there are no, let's say the fair value is equivalent to what the market is giving on, and they do carry some level truth. So you see US Treasury securities, US agency securities, non US government securities. They have some certificates of deposit and Tom deposits, commercial papers, corporate debt as well. They carry a lot of corporate debt as well. You see it's like the fair value is at 78 billion out of 191 total cash and cash equivalent assets and marketable securities. And you see that they don't carry any level 3. If you look on the right-hand side at Microsoft. So they have first, I mean, you see at the reporting differs little bit from the Apple reporting, but you basically have cost basis, unrealized gain, unrealized losses. And then you have cash equivalent short-term investments and also equity investments. And then. They also provide in a different way, what is the level of asset that we are speaking about? The category of as they were speaking about is 11, 1, 2, or 3. Or is interesting to see that Microsoft carries some level three assets. You see corporate notes and bonds for 58. This will be what, millions he has its 58 millions and also 91 millions of municipal securities. So Level 3 is that those are probably not listed on any stock exchange. So they have to do a, some kind of evaluation of it. Is their risk related to it. You remember that one of the tests I'm looking into is the amanda level three assets of the company is carrying. I mean, this is really not the material at all. If you add up 58 plus 91, you are at, let's say one hundred, one hundred and fifty million out of 122 billion of short-term investments. So I mean, we are far below the materiality threshold. So again, wrapping, wrapping up on financial instruments, what is important is that you understand that cash equivalence may, depending on the market, how depress it is or how hot the market is may go up and down if they're mocked them OK, to the markets. Specifically when it's a level one. Level two will be closer to the market and level 3, the tourism doing is if the company declared obviously the reporting has to be clean. But if the company has a lot of level of three assets are going to be, I will not say so suspicious but very careful in reading why are they carrying so much level three assets and is the evaluation, what are they giving? What is the manager giving terms of explanation related to the evaluation of those level three assets. So second example is about PP&E, Property, Plant and Equipment. And already said in the introduction, that's the and here we're looking at international accounting standard number 16. That explains PP&E. And specifically we are going to be looking at the subcategory of land and buildings. So I cannot tell you from the beginning that land is always carried at cost in, in a lot of US companies. And, and by carrying the land at cost, imagine that the land is carried at cause and the cost was ten million, one hundred years ago. I can guarantee you that that land is not worth 10 million. It's worth maybe 34510 times more. So, and this obviously will increase the book value of the company. But let's look into that. So if you look at US, gap is the guidance is ASC 360 and in IFRS is 16. So in ES6, and you see here the extra output, you also the URL when you can, where you can look into it. It says that an entity can choose. So here you see a difference between US GAAP and IFRS them in IFRS, a company can decide to carry, for example, PPE at cost or re-evaluating the asset. So the PP&E assets and you have to decide, you cannot change all the time between carrying at cost or the re-evaluation model. And specifically in US gap, what you typically see is that in US gap, PP&E is carried at cost plus depreciation, which is difference versus IFRS. And which means that on US companies, you're going to have per default an undervaluation of the book value. Why? Because typically PP is carried at cost and not at what it is worth. So imagine a company has bought lands, a company has bought buildings. Those buildings are worth much, much more than what they were worth when the company bought them. So that's something per default in US companies that you need to do the homework and do a re-evaluation of those PP&E assets. And so I will not be going into the details, but there are also a lot of companies who carry buildings as, as leasing. And again, I said we will not be going into the details, but there have been some changes. And the important point here is that those standards are changing. Ifrs standards you ask gaps Dan us are changing over time. We discussed earlier in the in the previous section the CDOs, subprime subprime related assets that they went from level that they were carried as level one and then people didn't know how to evaluate them. So remember that standards change and accounting methods change as well. And where you need to be careful about as well is when you look at property plan and equipment, you need to differentiate between also property that is owned and also that is least. So if we look now at rational and carrying, you see that there are some, let's say assets, some that are called property, plant and equipment with around 2 billion and right of use assets. And then there is also on the carrying side, you see around 4 billion of right-of-use asset and 2 billion of property, plant and equipment. And you see the lease liabilities. So they also now carried in the balance sheets because a long-term lease, so this is specifically when you rent a building for maybe 10 years, the standards have changed that now you need to carry that long-term lease as an asset, but at the same time as a liability. And in a couple of years ago, it was only carry in the income statement as operating expenses. So there have been some changes around that. When you look at Microsoft and Apple, you see that Apple carries 36 billion of PP&E. It says net. So that is after depreciation and you have the benefit of Microsoft. You see that Mike's of caries 44 billion of Property plan and equipment with an accumulated depreciation, and on the operating lease right-of-use assets. So Microsoft would be renting around 8 billion. And obviously you're going to have the counterpart that will be sitting on the liability side of the balance sheet. So if we look now and one of the tests that I like to do is also how much PPE the company carries versus its total assets. Because one of the things that is interesting to see, I mean, when you're looking at a start-up that only has, let's say, software intellectual property, the ratio of Pb, 22 glasses will probably be very close to 0. Here you see on those companies that Reshma and carrying, they carry 19 and 25 percent respectively of let's say, of property, plant and equipment, net of depreciation versus the amount of total assets. This is normal because Richmond carrying being luxury. Active companies, you probably own a lot of stores. They're going to be also owning their supply chains and their manufacturing plants as well. Then you have Apple and Microsoft. You see that Apple only has 11 percent of its PPE versus total assets and max of 17 on outside probably. I mean, you may know that they outsource a lot to Foxconn in China. So this is the cost of sales. So they don't carry a lot of own buildings. While Microsoft, they have been over the last years investing heavily into datacenters for the Azure offering and macs of 365. So this is why I didn't do the analysis, but this is the reason probably why Microsoft carries more PP and E versus Apple, for example, because they are heavily investing into datacenters. And when you look at rich man carrying, so remember we're looking here at the European standards in the node. So this is an extract of the rich man carrying annual reports. You see that specifically there are some nodes on the consolidated financial statements. And node number seven flourish more sense at all. Property, plant and equipment is shown at cost. And it shows you the depreciation time, none of those assets if this building is 40 years penning machinery 20 years, and fittings, tools and equipment, 15 years. And very important it says that the land is not depreciated. When you look at carrying, it says as well, the property, plant, and equipment are recognized at cost and with the exception of lands where there is no depreciation. So this is really typically, again, the example where per default you're going to have the balance sheets. And remember that Pp is very high for those companies, it was above 19 percent, orange one above 25 percent for carrying that. If there is a huge part of buildings and even specifically land on those balance sheets. That's the book value is undervalued so you have the opportunity to review the book value of those companies. And when we look at Apple and Microsoft, stay separate land and buildings from the rest. So this is again part of their nodes and the same for max of sushi, that land and buildings are currently 1799 billion at Apple. And what is interesting with monks have is they have separated already land versus building nhs improvement. So they have one dot h billion of land and buildings and improvements are 33 F9. And what is in there is note as well on the marks of Side Ref putting the red frame that it says that land is not depreciated. So if you compare one versus the other, we can only estimate out of, out of those 17 dot 95, 2 billion at Apple, How much would be lands or just an estimation, a pro-rated estimation I'm seeing, okay, leaving less than 1 billion is lands. Apple clearly says that like max of that it's a straight-line depreciation method. And that's the fair value measurement of land max of say specifically that land is carried at cost, while Apple does not explicitly make a statement around that. And also there is a difference, for example, between the depreciation periods, the precision useful life of buildings, for example, it's four years or the remaining life of the building well at max of between five to 15 years. So you see that there are differences between, between the two on, when you look at buildings. And for land, for example, apple does not state anything about land if it is depreciated yes or no. And monks of just says that it's not depreciate it. So now we're going to do a precise exercise. We're going to take Reshma. And for the sake of the training, otherwise, it would take us an hour to do. The four companies are just going to use reach mouse. Remember that original Reshma was carrying around 27 billion of property, plant and equipment. And we're going to go now deeper into it. But the first thing if we want to adjust that asset is we need to understand when the buildings have been bought and how the price of real estate has evolved. And here I'm giving you some statistics. So step one is to know what is the yearly inflation of real estate. So depending on market, obviously it will change. But we're going to take as an average that every year real estate increases by five to 6%. That's more or less, I think a good rule of thumb is to take this. And you can look here, I've prepared the stats on US, Switzerland, and the UK. And you see that it indeed confirms the average 56 percent increase over year. Step 2. And this is really, really deep dive work that you have to do. The company will not facilitate your homework, so they will not tell you this is the amount of land that we have and this is the geographies. That the company has shops and supply chains. So you will really need to do your homework. It can be through press articles, but it can also be that you compare one balance sheet versus the next one year over year. And this is actually, and I'm showing you this here on Slide 73. This is what I've been doing on Reshma. So I've started in 1989 and I've been looking into all financial reports and trying to find out what was the land's worth and how it was reported. At that moment that the report was published. So in 1989, we had originally nominal land value of 29 dot 63. And so they were specifically separating land from buildings. And I have considered and here was a little bit more precautious. I didn't took five to 6%, but I estimated that there was a 4% increase year over year of the price of that lands. And what I was doing at that time is always comparing 11, let's say one annual report of the company versus the next one. And trying to figure out because sometimes it happens at the company does a divestment and suddenly you have the land value going down or the PPE value going down. So what I did is I really tried to do this from 1989 to 2020. So that's like 31 years I did this and I had two more or less establish and take some assumptions and judgments. So the first ten years, I was estimating that land was around 5% of the total tangible assets between 1999 and 2000 and two hours. Pretty interesting is that Reshma was indeed explicitly mentioning land and buildings. And from 2003 on, the we're again, no longer separating land from PP&E. So as estimating that land was 20 percent of land and buildings and land and buildings were reported as PP&E, which gives us words, which gives us nominal value. And let's say an asset that is worth 188, I think this is a millions of euros or Swiss francs doesn't matter. And at present, real value. And again, I was obviously discounting using this counter method and present value method. So I'm at 336 million or 330, 655 million worth for land taking those assumptions. So we can always discuss how those assumptions are good or not good. But as the assumptions are constants in the nominal scenario and in the present value scenario. What is interesting is that I'm considering, that's my judgment. This is why company version isn't art. I'm judging that as land is carried at costs, not depreciate it, that there is nearly 150 millions of assets on the valuation for that. So this is difference between the 336 that I I brought the land that has been bought between 1989 and 2020 at its present value with a 4% yearly increase of the real estate. And comparing these two nominal value and the difference between the two is one hundred and forty eight hundred fifty five. So it's I will not say nearly doubling, but it's not very far away from nearly doubling that figure. What is the impact by doing this and this, what I'm showing here is that remember that earlier I had an equity that was 17 dot t2, 59 billion. And I will be now readjusting property, plant and equipment. And I'm considering that land is not being depreciated is what Rushmore is telling me. So actually I'm going to be adding those 148 million that are missing to the PP and E. And this is what you see in the lower red frame. Now the PP&E is it was worth nine dot-dot-dot 89 billion and now it's worth 10 dot 0, 37 billion. So what is the impact on the book value? The book value has gone up, obviously. I mean, I've been adding value to an existing asset that was carried at cost. And as a balance sheet has to be balanced. That's principle of the balance sheet. So you have the assets that are worth X, and I'm adding €148 million to x. That will increase the equity sides. So this will increase then by, by itself the book value and also the price-to-book and the price-to-book the other way around, as I'm dividing by a higher figure, my price-to-book is going down. So this is how I do readjustment of land, for example. So the net effect on the price to book value, or just on the book value is around 1% of the book value has moved from three dots. There are 632, and the price to book comparing it to the current share price has gone down from 215 to two dot 13. So you see just looking at Lands and the, it took me nonetheless an hour to do this calculation. But I see that there is a 1% difference is 1% material, you could argue, well, no, it's not. But nonetheless, you may have companies that you want to invest into that let's imagine real estate companies where like some Property Group, I have not analyzed Simon Property Group. I think the ticker is as PG. If they carry a lot of real estate and they carry that real estate at cost. I mean, as their core business is real estate, the equity value of a company is maybe I would need to read the financial report, but maybe it's undervalued. So last but not least, and this is actually something I'm covering as well in my value investing cause is doing a modified book value or adjusting the asset specifically on intangible assets. And the I mean, the potential hidden gem here is what is at the brand valuation is not correctly valued or reported in the balance sheets. Maybe just because the management wants to be more defensive than aggressive and overstating those assets. And again, if the brand value or the epi, the patents and trademarks are undervalued if we re-evaluate or we adjust them, obviously, the book value of the company will go up. So remember that here we speak about intangible assets and we're speaking, we're looking specifically at intellectual property. And IP can be a logo, can be an idea that can be legally protected. So patents, they protect ideas, trademarks that protect words, phrases, symbol sounds like the Coca-Cola logo. Copyrights that may protect, for example, music, artistic content and intellectual works. And then you have trade secrets. That's specific formulas like the Coca-Cola formula, that's a trade secret, but the Coca-Cola logo, that would be a trademark. And you're going to see also sometimes copyrights when there is, let's say, artistic aspect or intellectual work that has been done behind it. And brands, in fact, are trademarks. And typically they are used, I mean, brands are using business marketing and advertising for consumers and Cosmos to recognize very rapidly the brand. That's why all big companies have logos. And that creates a brand, creates and stores value over time is what we call the brand equity. And I mean, just to share my personal investment style. I mean, for those hands on the very investment, because you know that I look at Interbrand, global rankings and regional rankings of the top brands in the world. That's my investments are looking at blue chips and companies that have those gases, those economic modes. And I prefer to have those kind of companies. And really the idea is to have very strong brands that have the ability to maintain competitive advantage, maybe because they have also a lot of cash available to keep that competitive advantage. Or just because a brand is so strong that people are willing to pay a premium to come back to that brands. And if we look at the trademarks of Reshma, Apple carrying, and Microsoft mean, you probably know, know all or a lot of those logos specifically looking at Apple, Apple Watch Apple TV, iMac, iTunes, Microsoft. You can have Skype, office 365, LinkedIn, Windows Azure, Xbox on carrying you may know Gucci if sand or Balenciaga. And on Reshma you may know cacti and one given up as for example, the diamonds and the luxury pens called More blah. But they also have some very nice specialist watches for men, like pantry I, WC, PRG, eagle occulta, et cetera. So those are trademarks and they carry, and they create over time some value. And how is this reflected in the balance sheet? Well, if you look at Goodwill or 0. Intangible assets. You see that on really small. So remember, first of all, goodwill is the premium that is paid by a company for an acquisition. This is carried in terms of goodwill. And then the other intangible assets is very properly everything that is intellectual property and trademarks and everything and goes that comes with that on carrying sudden you see that goodwill is at 2.5 billion and the brands, I mean, they they report it as brands and other intangible assets. While you see that we only says other intangible assets. So carrying carries, carrying carries it feels were to say that carrying carries seven dots to 60 a billion of euros of brands and other intangible assets on its balance sheet. And what is interesting when you look at Reshma, you can see in fact how how they treat intangible assets from an accounting policy. And they consider that an intellectual property is depreciated over 50 years. And and you see the differences between, let's say the book, the net book value. And here on the right-hand side you see in the red frame how intellectual property related trademarks are estimated between April 2019 and the different versus April 2020 sushi that there is re-evaluating this one year after the other. And one of the thing that is interesting as well is that if I look at my Interbrand, global 100 brands, Rushmore is they're actually at position number 73 for the year 2020. And Cartier alone has a brand value of 74 billion according to Interbrand dollars, but let's assume it will be constant currency. So here's the catch. One. I mean, remember, I was showing you all the brands and trademarks of small cafe is just one. Cartier alone carries seven dot 4 billion worth of brand according to Interbrand. While Rushmore in its balance sheet, says at all the brands altogether only worth 2 billion. You see the trickier. And some people will maybe argue or disagree with me. And I'm saying, hold on a second. If I would have unlimited resources and financial resources, imagine that would be Warren Buffett's. Maybe at a certain point in time, I want to buy Reshma. I need to do a fair valuation of Reshma. Rushmore carries 2 billion of IP related assets in the balance sheet. What an external, let's say marketing and brand institute is telling me that just one of those brands of Reshma and all the other brands also very well-known, Just one which is Katya is a top 100 brands in the world. And according to them, that brand is worth 7.4 billion. So you already have seen that there is difference of five, that $4 billion on one brand. And this is actually what we are doing. So what an arbitration. And again. A company evolution is an odd, so I had to do a judgment here. So what I decided to do is that I decided that Karachi are gonna reflect it at 7.4 billion and vancomycin upwards, I find it on another one. You have the URL on the left-hand side and the bottom, the source that according to another brand institute, they valuate the Vancouver and outputs brand at 870 million. And for each of those iconic watches, brands are going to validate every brand at 500 million just for the sake of doing it. What is the impact of that? Is that when I sum up seven dot four plus 870, and the big watches are the big watch trademarks at 500 million each are going to be sitting on 10 billion of intangible intellectual property related assets versus two that are carried on the balance sheet. And I could do the same for carrying. So carrying, they carrying, carries six dots, 7 billion worth of brands in their reporting to this as again an extract of note 18. And according to brands, they have in position number 32 in the 2020 best global brands. Gucci alone is worth 15 or let's say around 16 billion US dollars. According to brand z and other brand institute, EFS aloha is worth 47 billion, which are fun, honestly a little bit overstated. And I did the following judgments here to re-evaluate the assets of carrying specifically the intangible assets are decided that all the other brands, it's not necessarily the case because Balenciaga, Bottega, they are pretty well-known luxury brands. But nonetheless, I said that the other brands, with the exception of Gucci and seller, are less iconic. I will not really evaluate them. But nonetheless, I've decided to reevaluate the intellectual property and the brands that carrying, carries. And I said there are 600 billion according to Interbrand on Gucci 47. That's for me, it really overstated. So I just said that's my arbitration. I going to consider that the value of those intangible assets is around 30 billion. So basically 15 billion of Gucci, 15 billion of 15 billion of if Santa Hall. And instead of seven of 6 dot 729.9 billion in the balance sheet. I'm going to build this open. I'm going to summarize this. What about Apple and Microsoft? Same exercise. Apple in their balance sheets does not carry a lot of information. They just state other non-current assets. One, Microsoft, they carry a lot of goodwill. So probably they have done a lot of acquisitions. And on the upper side, they don't split between goodwill and intangible and other intangible assets. And Microsoft carries 7 billion of intangible assets. So again, the same exercise, I've been looking into the financial report of Apple. And actually, this non-current assets is strongly linked to restricted cash from what we see. And there's some leaves related assets and liabilities. So it does not feel that Apple is being, can I say transparent about any goodwill trademarks that they have? Nonetheless, if you look at the Interbrand ranking, apple was the most value it's and most worth brand in the world in 2020, they own spot number 1. And the Apple brand is worth, according to Interbrand, 300, 22 billion US dollars. So what's the arbitration here? I will consider that the remaining 30 billion that we had in the balance sheet, removing restricted cash and other non-current assets that are linked to lose this. Remember, we are coming from 42 billion of non-current assets and I'm going to be removing so this restricted cash around 2 billion and removing operating leases for around 10 billion. So we're going to be keeping 30 billion of other non-current assets that I would estimate being trademarks. And they're going to be adding 322 minus those 30. Otherwise, I will be counting twice as an intangible asset, which adds me to a 192 billion US dollars to the company. On Microsoft sides, they're a little bit more specific on intangible assets. So they they separate between technology-based customer-related, marketing related and contract based intangible assets. And when I look at the Interbrand in the red frame, maxwell has been the third most valued company or brand in the world in 2020. And interbrand is estimating that the maximum brand is whether 166 billion. So my arbitration here is to say that I will be considering the 70 billion net carrying amount as unknown. And so I'm not sure how this relates to trade monks and I will, just to avoid double counting, are going to take the 166 billion that are given by Interbrand. What according to them, the trademark of Microsoft is worth minus those 7 billion to avoid double counting, which adds a, which will add on a 159 billion to the balance sheet. So now summarizing this, so I got to know, walk you through. So what I did here, I took Girish more carrying on left-hand side and up and Microsoft. And what I'm changing and what I am adapting is what the assets that I haven't been discussing. So I just did her Reshma Readjustment of lands and I'm carrying it now, re-adjusted. So remember that the price to book value of which Mao was 215. And now the price to book value is 213. So this is after the land adjustment, if you remember the 148 million. What I'm doing now is I'm changing the trademark value, so I'm adding those amounts that I've decided time adding or let's say modifying the trademarks. And by doing that, actually, I will obviously be changing the book value of the company. So let me show you if I take Reshma, Reshma, the book value before adjustment of the intangible asset is 30 or 32, and the modified book value now as I've been adding trademark to it. And remember the calculation I did earlier. If you remember this, go back a couple of slides. In fact, my book value is 43 dots, 999, which means that by readjusting the value of the trademarks of really small. And if the market price is at 6455, my modified price-to-book value is 147. It's pure coincidence, but I'm at that time and this is the reason why I bought wish more when it was at 57. Is that with this calculations, the readjustment of the land, readjustment of the trademarks. Actually, the market was giving me Rushmore close to its book value at 147. Look at carrying. When, when I adjusted trademarks of carrying and remembered carrying, I did not do any lands reevaluation. This is something I would have to do. What I didn't do it for safekeeping. This lecture, which is already very long, one, simple. You see that the book value goes from 82 to 272, and the price-to-book goes down from 1687 to two dot 08. What about Apple? For Apple, if I add these, you remember the calculation on the trademark and from Microsoft, my my book value, they do change in deeds. And my book value earlier was treated 85. And for Apple it goes up to 21. And which brings my price to book value down to 564, which is still not below three, but it gets closer to three. And Microsoft, my book value changes from 15 to 30, 663. So my price to book value at that time when the market was valued, monks about two to three dot seven to the price-to-book is going from 14 to 16 dot 11. So you see that the impact how adjusting an intangible asset, like a trademark, adjusting lands, just for the example of Reshma, has an impact on the book value. And this is what I wanted to show you and that you are conscious of this and this is a typical thing I do. And this is why also I invest into blue-chip companies. Because I have Brian institutes that give me that valuation that I can then adjust when I look at price to book or the book value of the company versus how the market is valuing the company and the assets of the company. And here you see through the example of Rushmore that at that time, again, one test is not enough. But at that time with the adjustment of land, with the adjustment of the trademarks. In fact, I was even below 15 when the market was evaluating at 57. So here the market the calculation was that they were at 6455. But you understand why at 57 I was buying the company if you would only look at the value of its assets, I think at that time it was one dot 39, the price-to-book value I had when the share price was at 57. Wow, okay, The other very, very long lecture, but nonetheless a very important one if you are looking at doing and becoming more advanced investor by evaluating the companies, is being able to read the balance sh 9. Asset Based Valuation - Liquidation Value: All right, welcome back. Investors. After the very long lecture about adjusted asset methods are modified book value. Another and the last lecture about asset-based valuation and will be around liquidation value, which is also called sometimes scrap value method. So what we are looking here is validating the company in case that would be an emergency of having to sell all the assets of the company. Maybe because the company is going bankrupt, or the company, or the company owners have decided to sell off the company. And so it's in fact, a liquidation scenario is really the worst case scenario that you can have when evaluating a company. And again, we are still looking at book value here. And one of the interesting, let's say tests to do is comparing the liquidation value. So we're going to be again, readjusting the assets with a ratio and liquidation ratio. Going to explain this in a couple of slides and comparing this to the current market price and during depressed markets, what is very interesting is that you will have, as you have a price to book value, we're going to now calculate a price to liquidation value. And you're going to see that also in case of a fire sale, that the market is giving you the company at a pretty interesting and cheap, depressed price. And this is why the liquidation standard also sometimes can be used during the press markets to see if the company would have to do a fire sale of all its assets. How is the market valuating the company and the close it gets this price to liquidation value, similar to the price-to-book value to one. Obviously, then the market is being very depressed. And what requires readjustments, typically in a liquidation scenario, well, again, it will be most probably the acids or cannot imagine that credit holders or that equity holders would be willing to renegotiate or restructure their liability. So we're gonna be looking indeed at what are the liquidation ratios we can apply and the judgment around applying such ratios to the asset side of the balance sheet. And one of the important things that you need to keep in mind as when there is a fire sales is when you, if you would go to retail shop and the retention of hazard of stock, imagine codes. And those codes would need to be all sold out by the end of the week. Depending on how much time remains until end of the week, probably the discount rate is going to increase. So maybe they won and there is seven days left. The shop owner will apply maybe 10, 20% discount. And the closer you get to the end of that period, at a certain time, the retail owner of the shop owner would have maybe applying 1890 percent. And this, this principle of time versus price applies as well in a liquidation scenario where the more time you have, probably the last year we'll have to discount the price of the asset. The last time you have, the higher probably the level of discount that you will have to do. This obviously depends as well on the amount. It's an often demand question on how much supply of that assets are also available on the market. So when we speak about liquidation of a company, indeterminate predation, we find the slope term liquidity. And I think it's important in this kind of methodology to understand what liquidity means. And liquidity means in fact, and it refers to the ease of converting an asset into cash and then hopefully affecting as less as possible it's book value and price and the acid liquidity function. And I've been drawing this from my experience as well. I'm about depending on the type of assets, what could be a good adjustment ratio if we are in a fire sale situation on liquidation scenario. So we have on the x axis, the liquidity. So the more liquid the asset, the more you're going to the right-hand side. And on the y-axis you see the adjustment ratio that we're going to apply to the balance sheet of our four companies, original carrying Microsoft and Apple. And obviously, I mean, the liquidity function depends on the companies, the vertical industry it is, it is in. And also irrationality may occur. And obviously remember that's timing applies to it as well as I was showing in the previous slide. The more time you have, probably you will have the opportunity to sell it closer to its fair value. The last time you have probably you will have to apply higher discounts if you're in an emergency situation. So let's start with cash on the right-hand side of this curve. I mean cash. Imagine the company has $1 of cash in its bank account. That $1 of cash is converted one-to-one into a dollar of cash. So the conversion ratio, even in a fire sales, is one-to-one or 100%. If look at marketable securities and cash equivalents, will they be converted one-to-one, where there's going to be some market fluctuations maybe between the movement that the company has bought the asset. Remember in the previous lectures that there were some, let's say, some losses on the Level 1 and potentially level two assets that we are evaluating in one of the couple of the companies we were looking into. So we will consider that from the marketable securities and cash equivalents, not all the assets will convert one-to-one. There's gonna be some unrealized gains and unrealized losses. But in a fire sale situation, again, I'm making the judgment that not everything may be converted, so it's a choice will be apply, 100% will be applied 95 percent or less. When you look at accounts receivables. So those are actually invoices that the company has sent out either for products or services At the customers have been buying. And so if you're in a liquidation scenario, not all customers will pay those invoices, so you're going to incur a cost. And this is why already in accounts receivable, you will not transform 100% of the accounts receivable into a 100 percent of cash inventories the same I was giving the example of codes. During, let's say Black Friday, at the end of the day that maybe the level of discount is going higher just to get rid of all those inventories when you have stock. And you need to transform because you're in a liquidation scenario, you need to transform that stock into cash because you need to liquidate the company and payback credit tolls depth TO loss and also then hopefully there's something remaining for the equity holders. So for the shareholders, the inventory in case of a fire sale, depending on how much time you have, you will never convert inventory to 100% of what it is worth. The same with property plan and equipment. If there is a fire sale and there was a lot of supply in the market for those buildings, those supply chains. Prolly, you're going to incur a cost related to that. So you see that here we are already adjusting at maybe like 70 percent or below, with the only exception of land. Very probably if the land does not need any sanitizing, but probably the land that is carried at cost. If you look back at the previous lecture, maybe land, you will probably be able to at least to sell it at 100% or even to sell it even higher. Intangible assets and goodwill, that's always, I mean, goodwill could argue here and discuss that goodwill will actually be transformed to 0. It's a judgment. We're going to see it when we will be adjusting our full balance sheets of Rushmore carrying Microsoft and Apple. And, but maybe the trademarks. I mean, if Coca-Cola would have to liquidate, maybe there's going to be a buyer that is willing to buy the trademark, the word value or part of the value of the trademark. And here I've put it above 100% because very often the trademark, if you remember in the previous lecture, the treadmill is carried below the market valuation. Remember inter brand and brand z, how they were evaluating and Coca-Cola max of Apple, crafty, et cetera. So I'm taking the assumption here that maybe for IP related assets, maybe it's somebody in a liquidation scenario, there is a buyer who is willing to pay much more than what it is, how the IP related asset is reflected the balance sheet. So let's practice notice. So let's imagine that all those four companies have to be liquidated for whatever reason. And so we will need to adjust the balance sheet, the asset side of the balance sheet. So again, the SNARK goes like this. The company has to be liquidated, so all the assets have to be transformed into cash. And that cash remaining will allow to pay back debt. Credit told us that told us. And then if there is something that is remaining, remaining casual be used to pay back shareholders. So we're going to be looking at Reshma, all the assets, non-current and current assets. Remember, rational and carrying up IFRS reporting. So the long-term assets can be for the very liquid short-term assets are current assets. And for Apple, Microsoft, US gap reporting, so is the other way around. We have the very liquid assets first and the last liquid assets that come afterwards. So now let's practice this. So I've put the figures of the balance sheets into an, I've taken the main categories here just for the sake of doing the exercise. You see the upper table, Rushmore carrying Apple and Microsoft. We see how much they carry in terms of current assets and also in terms of non-current assets. And on the on the frame, on the red frame on the left-hand side where you see the liquidation ratio. This is why a company variation isn't art because it requires human judgment. I've taken the decision that cash, cash equivalence and short-term investments are going to convert them one-to-one. Because I consider that as there is not a lot of a level three assets cash equivalent in those companies, most of them are level 1, level 2. Let's take the assumption and I will be able to convert them one-to-one. So I'm selling off all the assets that would not be cached. And I'm going to have a one-to-one. And let's assume that the cost of transforming those equivalence and short-term investments, that there is no broker fee, etc. So let's assume that would be 100% inventories. I'm taking here the judgment that only that I have to apply a discount of 50 percent. So the value of the inventory, I will have to adjust it and to cut it in two because I'm assuming that if I'm in a liquidation scenario, I have to sell those stocks very rapidly. And here we have the chance that it's not perishable goods, like food and those kind of things, that it's mostly hardware and luxury goods. So probably maybe 50 percent is liquid overstated. But I'm just doing the assessments here and saying, I think that 50% is really kind of a worst-case scenario for the inventories original carrying Apple and Microsoft. Then we have accounts payable. Sorry, it comes receivables or trade receivables, where I'm saying that I will not be able to convert 15 percent. So I got to apply alkylation ratio of 85 percent. And then when I go into a little longer-term assets, I'm going to apply a 75 percent to PP&E. So I'm continuing going to be losing 25 percent of that value. Remember the curve that we have been seeing? Investment in financial assets because some of these companies carry financial assets or consider that they are of good quality. So there it will be 90%, so only losing 10%. Goodwill, Again, arguable. Should we put this to 0? Should we apply another factor to it? I've just, for the sake of the exercise, apply 30 percent to it. Under that, some investors apply a 0 to it and other intangible assets. This is now the trademark and I've just taken the trademark as it is reflected in the balance sheet. I've not done the adjustments as I was doing in the previous lecture. I'm carrying them at 50 percent and all the other current assets. I also going to carry them at a minus 30 percent impact, which means and you look at the second Rent frame where it says total and balance sheet adjustment. It means that from a previous balance sheet, let's say a total of assets where for example, for rational I was at like something like 30. Billion and I'm shaving off here more than close to 7 billion of assets. So I'm kind of readjusting the asset side of my balance sheet. And the asset side of the balance sheet in case of liquidation scenario will be impact but minus 7 billion. So basically the company is going from 30 billion for Reshma to 23 billion. And I'm doing the same for carrying, carrying was carrying 27. And I are going to be from the 2007 nearly shaving off. Ten billions are going to be at around 161617 billion. Remaining assets on the balance sheet side, same for Apple. Apple was carrying 323 billion and Maxwell was carrying 301. And I'm removing 57 billion of assets in case of liquidation from Apple and then also 60 billion from the balance sheet on the asset side of the balance sheet from Microsoft. So what does it have as an impact? Obviously, you are reducing the value of the asset side. Remember, balance sheet is balanced. So by reducing the amount of the value of the assets are going to be removing the equity value as well. And this is what I'm showing in the next slide, is that we had earlier, if you look at the equity attributable to parents stockholders, rational hat 17 billion of equity, carrying hat 10 billion of equity. Apple had 65 billion and one hundred and eighteen billion of equity. Now if you apply the figures, what I call the balance sheet adjustments, in case of liquidation, our equity is going down from 17 billion to 10 billion. Carrying We are actually very close to 0. We are removing from 10 dot 438 billion. We are removing ten billion, three hundred and fifty eight, so we are nearly close to 0. The company is kind of in terms of equity with 0, it means that in the case for carrying specific of a liquidation scenario, all the assets with the liquidation and adjustment ratios that we have applied will allow just to pay back debt holders and credit TO lost and nothing is left for equity holders. If you look at an apple from the 65 billion of equity, are going to be shaving off Fifty-six billion. So there's only eight 0.6s bit and then our left. And Microsoft from an equity perspective, I'm at 118 billion and I'm shaving off 59 billion. So I will be, the remaining value will be 58598 billion. So I'm shaving of half of it. And remember here, I have not been adjusting balance sheet in terms of land that is very often carried out cause and also the brand value. I just took the figures as they are in the balance sheet. So you could also again readjust this up by adding brand value on trademark into it. So net-net, what we're doing here, as already mentioned, is that we, the liquidation value is in fact derivative kind of the book value, but it's just the book value is there is no fire, so there is no liquidation of the company. One of the liquidation value is there is an urgency to sell off all the assets and convert those into cash to pay back credit totals, depth or loss. And hopefully there's something remaining for the equity holders, for the shareholders. So if now I adapt. So from the book value that we had before, and just look at Reshma. So the book value of Reshma, and again, this is without land revaluation, without brand value revelation. Initially at 36 and the price to book value of which was at 2.5th. If there would be a liquidation, the company or the book value of one share or what I call the book liquidation value of one share would be 18 000 seven. And the price to liquidation value similar to the price-to-book would be speed dot 57. So still, at, what does it mean? Flourish more this now the important point in terms of interpretation, it means that if the market is giving you a really small at that moment in time when I was preparing the cause at 6455, that even the liquidation value of the company is very close to three. So again, after the price-to-book, even the liquidation value is telling you where the market is really kind of under valuating the assets of that company. And remember, I have not even adjusted lands here and I have not even adjusted the brand value. If remember in the previous lecture, the, we were not starting at 3600 six in terms of book value before we were starting with the readjustments are the adjusted assets we were starting at 43. So so it's kind of giving me another signal that even in case of liquidation value that rational is currently cheap or cheaply priced at 64, 55 for carrying wire. That's more dramatic because the book value is close to 0. Obviously, I mean, we have nearly removed from the 10 dot 4 billion. We have removed ten to 3 billion. So the book liquidation value of a share is close to 0. It's 0.6s for same for APA, 0 dot 51, and for Microsoft, the one single share in case of a fire sales in case of liquidation would be at 774. And here you see that the price to liquidation values of carrying Apple and Microsoft, specifically carrying an apple or a 100, 89, and 233. That's huge. That's really a lot. While Microsoft, It's, well, you could say only, but it's still high at 2890, but it's definitely lower than the carrying and the apples. And again, remember, I have not been adjusting land flourish more carrying up and marks off and in this calculation and just took the values as they were reported in the balance sheet. I've not been readjusting neither lands nor the brand's value of those companies. And, and hear from the four, we clearly see that there is something going on with Reshma. Even the liquidation value is giving me signals that the market at 6455 is on the validating that company. So that would give me a signal to kinda, you need to go deeper into it and understand what is going on and maybe the market is oppressive audit. And again, this is what actually happened. Remember as I said it in couple of lectures earlier. And it's not a solicitation for you to buy Reshma is that I bought rushmore at around 56, 57, and I've sorted of ads around 85 plus dividends that are received and stock options. So I think I made a good eight months time, I multiply it nearly. My, my value will not say by two, but very close by, by 2. So let's say by plus 60, 65 percent, which is I think an occasional written after eight months. So with that wrapping up the asset-based valuation, so again, making things clear, the first chapter of going deep, so chapter number two was really about asset-based valuation. So what you have learned in the previous lectures has been how the market is valuing the company based on market capitalization with a quick test but cached in market cap, which is very interesting when the market is depressed. Then we looked at the very simplistic book value method, which is the equity value method. Then we really went deep into how can we read those figures of the balance sheet, of the asset side of the balance sheet. And is there a story where we can maybe increase or we have to decrease and adjust the book value of the company. And then we just finished the lecture about liquidation, which is the company has to be liquidated. There is a fire sales and we were compounding similar to the price-to-book value or price or liquidation value. And we saw that even for Reshma and a price of 60 for the price to liquidation value was very close to three, which is a signal that the market may be on the validating that company at that price. So with that wrapping up chapter number 2, very well done. I hope that it was you have learned something out of it. And in the next chapter, number three, we're going to go more into going concern valuations, which are the valuations where the company continues to operate. We are not in a liquidation scenario. And remember that to public investors do not buy companies just for the assets that the company owns, but the future earnings and future streams of revenue and cash that the currently existing assets will generate in the future. And this is the going concern variation chapter that we're going to be discussing. Thank you. Tuck you in the next lecture. Thanks. 10. Going Concern Valuation - Multiples: Welcome back In West US after having finished chapter number two, which was an absolute valuation category of methods that we were looking into, but specifically looking at the assets. So what is in the balance sheet of the company? In chapter number three, we are still in the methods of absolute valuation, but we're going to be looking at the going concern valuation method. So remember, and this is important for you to keep in mind that asset-based valuation we are only looking at what the company is worth based on the assets that it carries in the balance sheet. But normally invest as a rational investor when he or she decides to invest into company. It's not just for the what the company is worth today, but it's more very probably looking and trying to value the company on what the currently existing assets were January in terms of future earnings and future cash-flows. And this is where we're going to be discussing about growing concerns have going concern. Remember it's an accounting term that says that actually the company continues to operate for an unlimited period of time and the current existing assets will generate a certain amount of cash and of earnings. So we're looking at going concern valuation, let's say category of Revelation methodologies we are going to be looking at, let's say 34 methods. The first two we're gonna be looking into is multiple revenue and multiple earnings, which is part of this current lecture that I'm going to be introducing you. And then we're going to go deep into the free cash flow to the firm, which is also pretty well-known by discounted cashflow method. And we're going to also be addressing how to estimate the cost of capital. And then the third part will be the cashflow or the Free Cash Flow to Equity. We're going to be more discussing dividends, share buybacks, and those kind of things. So let's start with the multiple revenue and earnings method. So a lot of, let's say, junior investors when they tried to value or even when they comment amongst them. When a company has been bought or company has been sold. This times revenue or times earning method very often pops up. I mean, I have already heard specifically in the tech industry that company was sold at a multiple of 30 times. Their company was sold at a multiple of 100 times or 15 times 19 times. And then we need to differentiate between the terms revenue method and the times earnings method. So what is a times revenue? Is you apply a multiple on the amount of turnover of revenue that the company generates. I mean, I definitely don't like it because, I mean, let's say printing invoices. It's not for me or reliable indicator of valuation, but some people have a tendency that we like to, to apply a times revenue methods. One that I believe is little bit more, let's say rational is a times earnings method. So it's an absolute valuation method based on the profits that the company is generating, let's say on the last year. And there's multiple that is applied to that. And it's sometimes also considered very similar to the discounted future earnings method. And very often in most cases, people look at earnings before interest and taxes. Sometimes even earnings before interest taxes, depreciation, amortization for the earnings number. So there you're gonna see that it depends. And the multiple, so the conversation about the multiples, how do we end up with multiple? Why? Why should a company be valid at nine times its earnings or 20 times its earnings? Are, you already understand that there is some part of irrationality to it. But there are some, let's say, report some standards that depending on the industry type and the businesses, specifically in public versus private equity, you're going to see indeed some, let's say valuations, all those, yeah, valuation indicators or these times earnings effector, that is, let's say summarize by some other people. One of the most known is as with them on around that we already said is Dean evaluation. So he doesn't multiple update or regular updates on those multiples that we have also the deal stand's value in next DVI. And then also there is a university called the Pepperdine private capital report. And this was a pretty interesting to read that one and to see what are the multipliers that are applied. So let's go into that. I'm using here the deal stand's value in banks and the US, Guatemala, Iran report. So if you look at the deal stands Valley index and I've put your sources below. You see that for example, the DVI for and information technology considers that the selling price to the EBITDA is 11 dot t2 times. So that would be the earnings multiple that will be applied. So if a company is printing 1 million of earnings in the last fiscal year, if the company would have to be bought. The market is telling us, the analysts are telling us there is a consensus that the company is worth 11 dot t2 times that 1 million of earnings. So that would be than 11 million of earnings. And we have, for example, if you look at retail trade because you're going to bring this back to Reshma, carrying Apple and Microsoft in. The DVR report does not clearly put luxury as a separate category are separate sector or industry. But let's consider it would be retail trader. And here are the multiples are at three dot eight and you see the average, the median for all sectors would be for DOT 4. A multiple, earnings, multiple on EBITDA, let's say factor. If you look at as well, don't want around as what ammonia is also looking at. So he has the enterprise value to EBITDA, but also the enterprise value to EBIT. And here we see, for example, that four, so I've really filtered out, doesn't Apple computers and software. And we see that a parallel would be at 33 times, while the EV to EBITDA would be, would be at 469. So comparing it to the retail trade, you see that there is a ready A strong difference between the two. And you see that for example, the computers peripherals, which would be like information technology, the enterprise value to EBIT would be between 3243 and to the EBITDA would be 24 or 30 times the earnings versus a 11 dot t2 average in the DVR reports. So here's the already, there is kind of judgment that is a required between, between the two. What is interesting on the DVI pot or not interesting. But the thing that you need to keep in mind is that DVI applies to private companies. So we're looking at private equity and they are looking into how those companies have been sold over the past quarter. And I was remember, it depends when the report is being published. If the, if the market or the economy is depressed, probably the multiples will go down. If the market and the economy is very hot, probably the multiples are very, very high. If we bring this back and he's just an assumption that I've been looking at. So pre-tax income, so equivalent of EBIT. And if we take Reshma carrying abdomen, so the pre-tax income is one dot 19 8 billion flourish mod 7 Eleven for carrying 6700 09156474 from Microsoft. And if we want to apply this multiple, you would see actually that it gives us a multiple earnings valuation. So we're multiplying flourish more. 19 eight by 3398 would give us a violation of the company at 47 billion, carrying would be 92 billion, apple would be two dots, 2 trillion and monks of would-be to dot for 800 trillion. Now you can bring this back to in fact market cap. And I'm doing it this year, the calculation on a market cap per share. So we're looking at the share price of the company, which is 64567118223 from Microsoft. And if we take the amount the diluted wass or diluted weighted average shares outstanding and we divide the multiple earnings valuation. So we have taken the pretax income of the last fiscal year multiplied by this industry multiple. So it's a times earnings method that I'm, that I'm applying here and I'm dividing this by the diluted Wausau, I'm ending up at a multiple earnings valuation per share of 7729129 for Apple and 327 for Microsoft. And if you compare it to the current share price, you see that Reshma, with these multiple Earnings Valuation, it would be in fact, very close to its fabrication. Carrying would be undervalued by 28 percent, absolute be undervalued by 10 percent and Microsoft would be undervalued by 46, 47 percent. So the interpretation that you need to do on those multiples is that an industry multiple can be considered as an equivalent of buying a certain amount or number of years of future earnings that the company would provide to its shareholders. And, and obviously in the multiple, there is a growth factor because revenues never stay flat. So there is a couple, let's say, of assumptions that are behind that. How much will the company grow its earnings over the future? And this is brought into the multiple that is being applied. I personally, I do prefer to use discounted cash flow methods and discounted future earnings. I do not like to you there's multiple, but nonetheless, it gives a sense of how the market is valuing versus the current share price. And it's pretty interesting to see what the outcome is. But again, it's not my style, but nonetheless, you need to know that multiple times revenue and times earnings are sometimes used if it isn't private equity, but also in public equity. And my recommendation would be that you look at multiple or times earnings method and not times revenue because revenue doesn't mean anything. What is important is the earnings of the company is doing so the amount of, let's say, of earnings and cash and income that the company is generating on it's currently existing assets. So that's already wrapping up the multiple revenue and multiple earnings method. And the next one that will be actually a longer lecture about the free cash flow to the firm. The CFF, also often known as a discounted cashflow method. And we're going to be also discussing, be discussing cost of capital and how to land on cost of capital. So thanks for tuning in and hope to see in the next lecture, thanks. 11. Going Concern Valuation - Cash flow to Firm & Cost of capital: Welcome back investors. In chapter number three, you're going to be discussing now free cash flow to the firm and also going to be deeper into cost of capital, but also cost of capital weighted average cost of capital. So already telling you in advance, similar to the adjusted acid methods lecture that we had in Chapter 2. This one is one of the most important ones in chapter number three and probably also the longest one. So how would you would've been doing it, But let's, let's go into it. When, when we discuss free cash flow to the firm, which is also often known or used as discounted cashflow. I think for us it's important that we just set the foundation what kind of cashflows exist in companies? And in fact, and this is actually IFRS and US GAAP independent, if you would be looking at the cash flow statement and I'm going to show this to you later on when you're gonna go into the cashflow statement of carrying Reshma marks up and an apple. We have three types of cash flow. So the most known cashflow is a cash flow from operating activities which really focuses on the cooperation of the core business. It's also sometimes called the operating cashflow. And what is interesting in the cashflow if you compare it to the income statements or Emma, we have the balance sheet, we have the income statement and we have the cashflow statement. Remember that the balance sheet looks at the stock of wealth at the company has created since its inception. The income statement, we will be looking at a specific period of time and the cashflow statement probably we'll also be looking at the same period of time. So a difference between the income statement and the cash flow statement is that for tax reasons in the income statement you're going to see a cost of depreciation, which which actually has January's improvement in terms of taxes, but also an improvement terms of earnings per share. If you look at the income statement, well, in the cashflow statements, in the cash flow from operating activities, we will add back the cost of depreciation, which is a non-real cash cost. And we're going to see this afterwards. This is part of the cash flow from investing activities because when you are investing into an asset, you would have to spend the whole cache on it. So that's really the purpose of cash flow from operating, operating activities is looking at the focus and the cash flow that is coming from the core business. And then I set the cash flow from investing activities here we're going to be looking at investments if it is purchase of non-current assets or long-term assets, but also cash coming from the south of long-term assets. And remember one thing, when a company sells off a long-term asset that has a direct positive impact on its cash flow. But remember that that asset has gone, that asset will no longer generate new cashflows in the future. And then the third category of cashflows, That's the cash flow from financing activities. So they're indeed, we are going to be looking at all the types of, of, let's say, capital that is being used if it's debt or equity. And indeed, in most of the cashflow statements, you're going to us in the financing activity that's debt is being paid back and sometimes also dividends and share buybacks that are taking place in that section. So important also to keep in mind because we're going to use color codes that the cash flow from operating activities will be black, the one from investing will be red and the one from financing will be green. So just to summarize, remember, we are speaking here in this lecture, free cash flow to the firm, which is also known as discounted cash-flow. And free cash flow to equity will be something that we will cover in the next lecture. All right, when we look at Reshma and carrying and I said this is, it's pretty interesting to see that in the consolidated statement of cash flows, it is an IFRS company like Reshma carrying our evidence US gap company like Apple and Microsoft, the sequence is similar, so you always have the cash flow from operating activities that comes first. Then. So you sit in black with a total in the black frame. And then you have the cash flow from investing activities. And then you have the cash flow from financing activities that is green, and you have the same. If I move to the next slide, if you look here at Apple and Microsoft, Yeah, the same for Apple. You have the cashflow of the call it the cash generated from operating activities. First, then you have investing activities and financing activities. What is interesting for Microsoft, and I never understood why it was different is that they have for as the cash flow from operations, then they have financing and then they have investing which had a little bit work to me, but it is as it is. So just be and again, the purpose of my trainings that you develop an eye for those kind of things. Do you see that financing comes first in the monks of cashflow statement versus investing. So when we look at free cash flow to the firm, what we need now to be able, or it's also called free cashflow. What we need now to be able to determine it and to calculate is the amount of free cashflow that is available to the firm. And for that, and the advantage when we look at cash and some people say cash is king. The having good understanding of the free cash flow to the firm and also the trajectory. Remember here we are undergoing concerned valuation. So we're looking at what the currently existing assets of the company would generate in terms of future streams of revenue and cash. And this would allow us to determine the intrinsic value of the company. So also determining if the public equity, the market is under evaluating or overvaluing the company. It also the free cash flow to the firm will show if the company is able to pay back dividends, paid back credit and depth told us, but also potentially execute share buybacks. So when I look at free cash flow to the firm, some companies do calculate it and you have it in the financial statements. A very quick shortcut that I take looking at free cash flow to the firm is I take the operating cashflow and I add to the financing cashflow, which actually remains, remains me or leaves me with what it allows me to keep the investing. Let's say opportunities that I have after having done my operating cashflow and after having done my financing cashflow. So if you, if I bring this back to this very important scheme where you remember when we look at the balance sheet, we have capital on the right-hand side, and we have the assets on the left-hand side of the balance sheet. So remember that. The flow of capital goes this way. Either an equity or shareholder brings in a fresh capita. Sometimes fresh capital can be brought in through depth told us or credit told us that cash is taken by the management of the company, transformed into real assets very probably, with the hope that those assets are those investments into new assets will generate more cash in the future. This is what we call also return on invested capital. And at that moment in time, if you look at the big dots next to the board and CEO or inside the board CEO middle frame. Here. We have, so the cash that is generated from operations, that's our operating cashflow. There are indeed we have the opportunity to say, how much cash do I reinvest into real assets? That would be my investing activities, but also how much cash remains available to pay back adapt the going back to adapt holder. So that would be the arrow for a cash return to credit AS or credit toddlers. And the four B that would be cash returned to investors or equity or shareholders. So this is where the thread of will be at management level to the sonnet, which moment in time you go a that reinvesting into more long-term assets or just paying back debt or pay or paying off debt or paying back or giving a return to shareholders. And if you bring this now back to wish more carrying Apple and Microsoft. So what I tried to summarize here is the cash generated by operating activities and 11 way of interpreting it is obviously that the cash generated by operating activities should be positive. Because if that cash flow, the operating cashflow is negative, it means that it's not sustainable over time to run the operations as they are today. So there the company and the company management has to fix this urgently. But in most of the companies, the cash generated by the operating activities will be positive. This is what we see here for, for the, for companies. We have 23 billion flourish more 2.5th or carrying 80 0.6s by Apple and 606 for Microsoft. Then we have the cash generated by investing activities. So this is really how much the company is investing. Sometimes it can figure can be positive because it would mean that the company has been selling off long-term assets. You may have that effect as well. But here we see that the four figures are negative, which means that the company has been investing into long-term assets. So for Reshma, it has been a 226 million for carrying 1 dot 1 billion for Apple forgot to build an unfair Microsoft 12 billion of investing in activities into long-term assets. If I take my shortcut which is taking the operating activities, adding to it and I'm reading, I mean by this, I add the sum, I sum up the investing activities. You're going to see that here it will be plus. Because it's negative figure, the free cash flow to the firm will become obviously smaller than the operating activities. But imagine that reach more, instead of having invested, 826 would have sold of a long-term asset. So that figure would have been positive. So it would have been two dots, three plus 826. So there you would have had a free cash flow to the firm of three dot one. But remember, it's not always interesting to sell off long-term assets because those assets would no longer generate any future returns. So you need to be mindful about that because the asset is gone. So here you see in the red frame, what is the, let's say, shortcut of free cash flow to the firm. Before we go into financing activities who have one No.5 original wander 24 carrying 76 my Apple and 48 for Microsoft. And one of the things that you need to be mindful about is here, we have only calculated the free cash flow to the firm on one single period. Let's consider this to be an annual figure. Let's consider this to be the 2019 figure. But this is not telling us anything. So remember here we are in chapter number three in the going concern valuation. So what we need to look into is what is the intrinsic value of the company looking at the future stream of earnings and the future streams of cash based on the assets that we know the company has today and doing some assumptions around that. So the free cash flow to the firm on this one single one-year period is not telling us anything about the intrinsic value of the company. The only thing that is telling us is that the company is able to provide a positive result that is available for paying back debt and paying also probably, hopefully some written to the shareholders. So we need now to go further and we need to establish a model where we can estimate the intrinsic value. And this is what we're going to be doing in the next couple of minutes. So the first thing that we need to take into account is that here, I mean, I will be focusing on the cash-flow model. We're going to be discussing discounted future earnings in a couple of minutes as well. But here we're only discussing the free cash-flow model. And we will need to estimate what will be the growth assumptions of the company in the future and decide on how long we will be looking into the future. And we will also need to apply a cost of money to it, and I will call it a cost of capital. And this is where you see that. What I do like about the book value is that you're looking at the balance sheet and you can adjust with some judgment the book value, having an adjusted book value here, we are taking assumptions on future earnings and future cash flow of the company. And I can only tell you, you don't have any guarantees about those assumption that you're going to be taking specifically, if you look and this is why I look into I limit myself to the next 30 years. And I do not for those who have looked at discounted cashflow models on the Internet. You very often 30.5 years. And then a terminal value which simulates at the company is earning cash to infinity. Perpetuity, I do not do this because I consider that when you add this terminal value that the business case always becomes positive. So I can, I prefer just to limit myself to 30 years, which is like a already in average case in R instead of a best-case scenario. And I see where I add up. And the formula that we're going to be using is, as I said, we need to, because $1 today is not worth $1 in 30 years. So what we will need to do is to discount that related to the cost of capital that we're going to have. You could use the cause of inflation over the next 30 years and maybe use 2.5th percent as a cost of capital. I will be doing, will be doing it a little bit differently. So the formula goes like this, is the intrinsic value of the firm is you're going to be taking a cashflow baseline. I tend to use the cashflow baseline, which is the average of the last three to five years. I do not like to take just one single year, but I look at the average. Why? Because this would partially offset if there would be any sale of long-term assets. When I take an average, you will not have this spike effect. So I like to use a three to five-year cashflow baseline from the last three to five years, not beyond that. And then I will be applying in expected return percentage. And typically, I mean, if you remember and some of you having done my van investing cause I typically apply a six to 7% expected return. Will be showing you how really seriously calculate this. And I said, are going to be doing this over 30 years, discounting this with a formula that we have fear. So it's the cashflow for the first period. So for the next year it would be the baseline of the cashflow. Let's consider a three-year average that we have been using divided by the cost of capital. And then in two years time as $1 now will be twice as, as, as less valued in two years time and the same in three years and in 30 years, obviously a dollar now, it's probably worth, I don't know, half off in 30 years of what you can buy today with $1. So this is a formula, and remember that there will not be using a terminal value, I will be stopping at 30 years. So the point is as said, why, why do we need to discount this? Is because the value of money changes over time and this is basically due to inflation. And I will not go into economics if inflation is good or bad or deflation. I have a causeway, I'm discussing this. I just consider that money does not remain constant and your purchasing power of money does not remain constant. So we have to discount this back. And then also one of the things that I do, I do calculate a discounted cashflow, but also a discounted future earnings. I like to look at both, even though there are two different accounting concepts, but the very end cache will reconcile with earnings and vice versa. So remember that there is difference between income statement and cashflow statement. Just because there are some tax implications and tax benefits by investing, which will then, let's say increase the short term. Income statement versus the cashflow will look like. And this is what I just want to lay this down that, that you really understand this. Let's take the assumption that you are, you need a car, you need to cover for providing services to your customers. So you have two options. Either you rent the car or you purchase the car. So when you run the car, what will happen is that the car cost, you don't own the car, so it will not appear on the balance sheet. And the car cost of renting the car will be considered an operational expense. So this is what you see in terms of the upper frame. So on the operating cashflow, you're going to see the cost of the car on the income statement. We're going to see the revenue in blue and the same cost that goes over time. So you're paying a fee for an asset that you do not own. And this is, let's say, done over the amount of time that you're gonna be paying for that external service. What is cost or cost of goods sold or cost of revenue? If you wouldn't now decide to invest into car, that's the lower frame in the car purchase. So from an investing activity, you're going to have to spend all the necessary amount of cash for purchasing the car at day one, this is what we see in the cashflow statement, is that you will have to immediately pay the car dealer. And this will have a direct a full impact on your cashflow statement. But from an income statement, the car will be depreciated over time. Let's assume that you will be using the calf or five years. From an income statement perspective, you will be able to depreciate that over five years. So that's imagined the car had a cost of 100 K. So you're going to be depreciating 20 K if it is linear over a period of five years and then the revenue comes with it. So you see that between renting and purchasing, there are differences in the sense, specifically on the cashflow statement, that on the cashflow statement you will be impacted. So you balance, so your, your, your, your cash balance will go immediately down the moment that you buy these long-term assets. This is why there is a difference between the income statement and the cashflow statement. But I said remember that over time, if you would do the sum of renting a car over time, Let's take that as an assumption versus doing a one off balance. Cash balance decrease because you are buying the car at the very end of the day, they will reconcile. So you will not be able to trick the figure is because after here in this example, after five years, you will have spent the same amount of money in the income statement as in the cashflow statement. So this is not changing, but you just need to keep this in mind. And when we come back to the formula, so you have understood why I'm doing this kind of future earnings and discounted cash-flow because sometimes when there are two big discrepancies, I, I'm interested to understand. Why is there such a huge discrepancy between discounted future earnings and discounted cashflow. But so outside of that, I need to apply a cost of capital. And for the sake, I mean, this is an advanced invested training. I told you that the shortcut I'm taking is on cost of capital. I'm taking six or 7%. This is my expectation or not invest into something. I want to get this 67 percent, otherwise, it's going to be investing somewhere else. And remember that when we look at capital and in my personal, let's say setup, I do not use depth, only use my own equity, my own money. I do not leverage. And I'm considering myself as a my own company. But you could have another company. It could be an industrial and automotive manufacturer whatsoever. So they have two sources of capital that can be depth or it can be equity. Depending on if they use depth or if they use equity, the cost for equity will differ. That's one thing. Obviously you can imagine for the cost of depth, it depends on the interest rates we are now February 2021. The cost of debt is very, very low because the interest rates are very low. So it could be maybe easier to raise that then to raise fresh cash from, from equity from investors. So that's the trade-off that the CFO and the CEO will have to take. And one of the important things, and remember we also discussing here, growth companies, private equity, public equity is that the risk, so the cost of capital has to be adjusted to the riskiness of the cash flows and the earnings. If there is very strong certainty on the company, you will probably be okay to have a lower value of cost of capital. While if there's a startup, probably you're going to be at maybe 30, 40% of discounts rates on the cost of capital. And remember our discipline in time in introduction, I was telling you, typically, I mean, your cost of capital should be at least higher than inflation, at least higher than the risk-free rate over 30 years on the US treasury bonds. Then indeed you need to decide what are your expectations. That would be the weighted average cost of capital. So depending on how much debt versus equity you are going to be using, I only have a cost of equity. I don't leverage, I don't use depth. And then you hope that the return on invested capital by your investments or by the investment of the company you invested into would be higher than the WACC and it will be higher than the risk-free rate T3 and will be higher than inflation. If that is not the case, you got your are actually destroying value and destroying value of the money that you are investing. And when you go into cost of capital, I really wanna go little bit deeper here, because you can take the Schocken and say, I'm okay with a six or 7% cost of capital. But I want you to understand how cost of capital is really, let's say, calculated or some benchmarks that exists. And here I'm referring myself back to us with them on around me. I already told you is the dean of evaluation where we're going to see that he defines the cost of capital as the cost of capital industry. Because remember it's risk-adjusted, then a rating spread are going to be using. Let's say credit, Let's say agencies credit ratings to see when they read the specific company. Depending on if the rating isn't triple a or a, let's say a pure speculative rating. There obviously there is a reading spread that will increase, but then also there is a country-specific risks related to GEO, Let's say stability and geopolitical aspects. Let me, let me walk you through. We're going to start first with the cost of capital for industry. And I've put you here on the top next to the title of the source, where about them on Iran is publishing on a regular basis. What is the average cost of capital? And you see the number of firms is looking into. You're gonna see the big firms like Microsoft as well that are part of that. And then you have the cost of equity, the cost of debt, the tax rate average, and then the cost of capital. To make it simple, the average cost of capital at the moment I was preparing the training related to the latest publication of us wonderment around was 90 percent. So that would be the average between adapt and equity would have been six dot 90. In the sense that if you would have to take the cashflow independent of industry, independent of the risk you are looking into, you could take as a first approximation, 690 as an average cost of capital. And you already see that it's above the T3 of the US Treasury Bonds and obviously above inflation. If I look now specifically at IT, services and retail, and luxury is not part of it. I've been using hard lines here. You see that for IT services, the cost of capital would be industry-specific 755. Why didn't return would be ten to 15. What is the reason for that? It's probably because retail is considered a higher risk than IT services today, let's say in 2020, 2021. And now this is not enough. So we could say we just take retail and IT services cost of capital according to us with them on the run and bring this into our discounted cashflow formula. So now we will be looking at adding a rating spread. So we need to look and remember we have been discussing in previous courses of those rating agencies, typically looking at Standard and Poor's, Moody's, and Fitch Ratings. So they analyze that data, let's say all the solvency of the company and it will give a rating, will apply a rating to it. And we could argue about how good they were because I'm in during the subprime crisis, they put as AAA some CDOs, which are the very end turned out to be really junk investments or securities. And here we are considering companies, those are not complex. In most of the cases, the companies have a pretty transparent balance sheet. Not, there is not too much complexity associated to it. So what we will be looking is for our four companies to remember we haven't cost of capital, the rating spread and the geo spread that we need to add. And we're going to be looking at the Reshma. See that Reshma is considered, depending on when you're looking at, let's say if it is rating agencies on Moody's, they putting it as an, a one for carrying, it's a negative apple, it's an AAA one and for max of as a triple a. So this is telling us the rating spread that we need to add. So if we are speaking about a triple a, the spread will be 0 in fact. So we're just going to be using the industry risk weighted cost of capital. If it isn't A1 for Apple, we are going to be adding 040. You see this on the left-hand side, how the Moody's as a peer rating reflects a translates into the risk spreads. If it is an A1, we're going to be adding a little bit more risk. It's a 0 dot 74 Reshma. And for carrying a negative, you're going to be adding in 120. And then we have the country-specific risks will not go into it. But you can obviously imagine with all due respect, I do have African France, but that in Africa, obviously the geopolitical risk is higher. So obviously you're going to have a country risk spread that will be much higher if you would look, for example, at, I don't know, France for example. So you see that in France, for example, you're going to have a 0 dot 49 spread in the US is 0 spread in Switzerland, a 0 spread. So it really depends where you're gonna be having the company residing, that you're going to be also adjusting your risk with not only an industry related risk, not only a solvency risk that is given by the agencies, but then as well a geopolitical or geographic risk. And when, when we sum these up, so remember we have, we're trying to determine how the cost of capital, so we have the cost of capital for the industry. We have the rating spread that is coming from the notation that the notation agencies like Moody's, S&P and Fitch are given. And then we have a country-specific risks. When we bring all this together, we're going to be having for those four companies are following results. So for Reshma, we have, if we consider this to be written outline a cost of capital according to as well, the motor neuron, which is 10 or 15. Reshma has an A1 ranking rating. Sorry, we are going to be adding 0 dot 70 percent supplemental risk. And then as they are in Switzerland's, the country-specific risks will be 0. So we will be at 10 dot 85. If we look at carrying, carrying is written as well. So it's the same industry related risks or 10 or 15, the rating is little bit low at a minus, so we're going to be adding one but 20. And as it is France, according to 1000, as wonderment around you're going to be adding 0 dot 49% or risk. So we're going to be at 11, 84%. If we look at Apple and Microsoft, let's conserve as to be IT services. So the cost of capital for the industry is 755. Ratings are between AAA and A1. So for AAA we add 0 to rating spread and the US country-specific risks is 0 as well. While for Apple was going to be adding 0 dot 40. So remember that here at the very end we're going to be ending up at Reshma. If we take the cashflow, the three to five-year average, historical average of Reshma. Theory tells us that we should be applying a 10 dot 85 percent cost of capital to it, or expected return carrying 11 dot 84 and Apple and Microsoft 755 and 795. For Apple. You could also take the average cost of capital at six dot-dot-dot 90. And not looking specifically at industry, the rating, and the country-specific risks. And one of the main points as well that we can discuss. I mean, we have now remember in our formula we have discounted cashflow is taking the three to five-year average and discounting this on a specific cost because the value of money changes over time and we have to determine the period. Do we go 10 years, 20 years, 30 years of perpetuity very rapidly. What I just want to address with you is that I never go for perpetuity because there are a lot of changes happening in those companies. And if you look, and this is an interesting study that has been done as well. I think it's also a professor from the New York, from New York University. We see that the average lifespan of companies in the meantime on the SAP 500 is 17 years. So I consider that as I'm investing into blue chips and just look at the Dow Jones, how many changes happened between 1920 and 2010? I believe the thirty-years is okay. Ish, but I would never put a company into perpetuity looking at my free cash flow to the firm mothers. So I stop. And you're going to be seeing this also in the actual file that comes with this training. I stop at 30 years. It's your choice. You could do with 35, 40, you could do perpetuity. I do not do this. And listening into the podcast of the annual shareholder meetings of Warren Buffet. And you're going to see that also in some of his podcasts when there are conversations around discounted cashflow, he also says that kind of confirms implicitly that he's not going beyond the 30 years. So this is why also I'm stopping at 30 years because the average lifespan is going down. And I believe looking at blue chips at 30 years, I mean, like in Nestle Unilever, they will probably still be around in 30 years. So when we calculate this and this is what I'm showing you in my sheets. So what you will need to do in the sheet, you will have to bring in the current share price. You expect it written as an investor. And you will have to put in some assumptions in terms of future growth, in terms of earnings and cash flow for an I'm dividing the 30-year period into periods year one to ten, year 11 to 20, and 21 to 30. You could have the same growth for the three periods, but you can also maybe decide to flatten little bit lower the, the assumptions of growth. So we're going to be here putting 321 dot 50 in this example. And you see how these automatically calculates intrinsic value of the company. And I'm recommending you to indeed use the free cash flow to the firm sheet so that you don't need to do the calculation manually. You just bring in the numbers, the figures, and it will automatically calculate the discounted future earnings and discounted free cashflow. And calculate for you the value you see this in the way you have the safety margin on versus the current share price? If you have a safety margin, yes or no, if it is a read, is that you don't have the right level of safety margin. If it is green, is that you are probably added 25 to 30 percent safety margin. So also, obviously when we look at growth assumptions, we need to look at history as well. And I've been calculating this tool to be able to determine what is a reasonable growth assumption for the four companies are looking into it is Reshma carrying Apple or Microsoft. And have I had obviously, It's from a revenue perspective, but also from a operating income after taxes perspective. So, but we see basically that all those companies are kind of growing, but the growth assumptions are different. And then a set we need to take the free cash flows and we need as utterly you're taking three to five years in average. And this is what you see here. What is interesting, for example, for Reshma, they provide you the free cash flow calculation, which is interesting. Carrying is doing the same. They're providing you the free cash flow calculation as well. For Microsoft and Apple, they do not directly provided, so you will have to calculate it yourself. And remember what I told you in the beginning of this lecture that with Microsoft, the investing part of the cashflow comes after the financing and should be in fact operating, investing and financing. So if we now, I think we have now all the variables that we need to do our intrinsic value calculation. So for Reshma, carrying up and Microsoft, we have determined the cost of capital that you have on the right-hand side here. And if we bring this now into the free cash flow to the firm sheet with the average growth assumptions that we have looked into how those companies were growing. And we bring in the current share price, the number of outstanding shares. Remember, we're going to be using the diluted Warsaw. We put the latest annual earnings and the latest annual free cashflow. Remember here, it's best to take three to five years average. I just put here the latest annual one, but just for the sake of the example, whatever the value is here, what is already interesting on this rational sheet is you see that there is a very strong difference between the income stream and the cashflow statement. What is this telling me that probably during that year they have been investing much more then then potentially previously. So we see that there has been some higher cash outs versus the income statement. So probably they are betting on some future, let's say assets generating returns. So here at the prize of 59 or 39, just based on the latest annual earnings and free cashflow, we see that the intrinsic value on the earnings of 58 and of the cashflow is of 20, 150. And remember this is one method of looking at it. We are just looking at going concern. Remember what I'm seeing. One method is not enough. You need to do multiple tests to have a consistent story. And what we are also have been doing here is we have added the 10 dot 85 percent expected return as an investor, which I believe for luxury company as well as really small. We can argue about it. I find it honestly too high. We're doing this in for carrying. So carrying, remember has a higher risk expectations then, then we're small. So here we have an expected return of 11 dot 84 percent. And here we clearly see that on a current chapters of 567 and intrinsic value of the company, just looking at earnings and cash flow, where here you see they are very close. Earnings and cash flow. That's the intrinsic value after 30 years is 80 percent below the current valuation. But again, remember here, I can only tell you that we only have 2% to the 0320, 3% of growth assumptions for years one to 30. No terminal value as always. And we have a very high expected return as an investor at 11 dot 84. And I can already tell you this is pushing down the intrinsic value. Obviously, some exercise for apple at the current share price at that time of 118 with an expected return of 795. And then some assumptions on the earnings of 640, 45, 44, and 444. And you see the intrinsic value on the earnings is 69, that's 76, while on the cashflow it would have been 115. So it seems fairly valued at around 118. And then on Microsoft current share price to 23, this max of has the lowest expected return at 755 with some assumptions on earnings and cash flow growth. So 859659 and you listen, but you put in there and on annual earnings and annual cashflow, we see the figures and here the intrinsic value is telling us on discounted earns and discounted cashflow 128 and 157. So there is an overvaluation at 223 based on latest earnings and cash flow, depending obviously on the growth assumption that you're going to have for the next three years. And depending on the expected return as an investor, some people will say Yeah, but maximum is growth company. We're going to bring in 2030 percent. And I'm seeing yes, but you cannot have a company that grows by 30, 30% years. Otherwise, it would outgrow the US economy or even the world economy. So just be mindful about that, that you put some reasonable estimates that accompany may be a couple of years in a growth stage, but then after this becomes mature and will flatten in terms of growth assumptions. So when we bring all this together, and this is the last slide of this lecture, we have in facts that so if we take back the discounted cash flow calculation using, so the three to five-year average and dividing by our cost of capital is, we do have a I've been using here instead of our higher cost of capital using just 6%, which is my average. And I do see that Reshma, at 6% weighted average cost of capital, tells me that if the company would be valued at 35 just on cashflows and earnings, I would be I would be having a 25 to 30 percent safety margin on carrying. It's pretty, I mean, it's steep even at 6%. My let's say if fair valuation with a margin of safety of 25 to 30 percent wouldn't be at 150. For Apple at 6% weighted, average cost of capital would be at 75, which is not too far away from the 118 that we have. So maybe we just need to wait for a small market correction or even a bear market and who would be closed and having a good safety margin on Apple and for Microsoft at 165 or so, it's not too far away with a small market correction and with the current, let's say cash flow assumption that we have, we would be at 165, we would be having a 25 to 30 percent safety margin. And again, this is not too far away from the 223. So here I'm in from the four companies. We clearly see that carrying is the one that is most of, let's say, a correct valuation where I would invest into the 25 to 30 percent safety margin. And again, so just keep in mind that growth rates are difference between companies. Remember if I summarize this lecture that I'm not using a terminal value, I'm stopping off after 30 years. In this calculation, I brought back the weighted average cost of capital to 6%, but you could apply 11, You could for carrying, you could apply eight for APA below eight from Microsoft and 10 from Reshma. That's your choice. Here again, you see that company relation is an art because it requires judgments. And remember as well that here, I mean, what I was looking in the year 2019 is where again, you need to be intelligent when looking into those figures. Is that the results of 2019 and probably 2020 have been impacted by COVID situation. So probably cashflows and earnings are lower. So you need to think, do I take a five-year average just to offset the COVID situation and just being then one out of five years. So always keep that in mind that you need to have judgment when you do those free cashflow calculations. Do I take a three to five-year, what was the impact of a specific situation like COVID? You cannot bring in 30% growth rates over the next 30 years. That's just not possible. So be realistic about that and determine what is your cost of capital, depending if you're using depth, if you're using equity, I only use my own money. So I'm only looking at cost of equity and I believe that with six to 7% as an average, I am Okay Ish with adding this when I do discounted cashflow method, but that's at the very end of the day. It's your choice to decide how you're going to deal with that. And then last but not least, remember that this is how I behave as well. When you have done an intrinsic value calculation of a company at a certain moment in time, that you need to reevaluate that intrinsic value calculation every quarter. If it is not on a quarterly basis, at least every year when the annual results are out just to compare, did my initial assumptions, did they change? And this will sometimes, let's say, change the intrinsic value and sometimes intrinsic value because a company is generating more, the intrinsic value will go up. So this may change the perception and the judgment that you're going to have on the share price of the company as well. So do not forget to do this that you need at least annually, if not quarterly, to review your intrinsic value assumptions. Well as so with that, wrapping up the second lecture of Chapter number 3. So going concern, remember we are here speaking about going concern. So this one, the cash flow to the firm and we're really looking into what are the currently existing assets generating in terms of future earnings, future cash-flows, and putting some assumptions in, sorry, putting some assumptions in terms of growth, putting some assumptions in terms of, of earnings, and putting some assumptions as well in terms of the period we are looking here, I were looking at 20 years, 30 years perpetuity. My style is 30 years, and I stopped with 30 years. And my cost of capital as well. That's also an assumption that you need to decide. Will I am okay with the 67 percent. 12. Going Concern Valuation - Cash flow to Equity: Welcome back investors, final lecture of Chapter number three, after having discussed in depth cost of capital and how to calculate the cost of capital and free cash flow to the firm. In this final lecture of Chapter number three, we're gonna be discussing Free Cash Flow to Equity. And remember we are still in the section around going concern relation. So companies that will operate in the future, at least for a certain amount of years. So the thing that you need to keep in mind are top of mind when you're looking at the difference between free cash flow to the firm and Free Cash Flow to Equity is the following. Remember that free cash flow to the firm to make it simple, it was we take the cash flow from operating activities and we add to that the cash flow from investing, investing activities, which most probably will be a negative figure. So you're gonna have a positive figure, hopefully in the cash flow from operating activities and the negative figure because a company is investing into long-term assets, that would be the free cash flow to the firm. So that's what is remaining in terms of cashflow, which is freely available to pay back debt and to pay back equity holders. So shareholders, whenever we discuss Free Cash Flow to Equity, in fact, we are removing from the free cash flow to the firm, the damped part. So basically, free cash flow to equity is the same as free cash flow to the firm. But after having paid back depth this amine, Let's take that as a shortcut. This is the way you, how you need to think at equity or Free Cash Flow to Equity. And if we look at, I mean, you know, this scheme going from capital that is brought in by depth total loss or shareholders transformed into assets in the expectation those assets would generate a positive return. So return on invested capital with some operating cashflow than the company has to decide. Do we reinvest back into longer-term assets, or do I pay back that up? Or do I give some return to shareholders? And here, when we're speaking about Free Cash Flow to Equity, we're no longer looking at adapt because that has been removed. Now we are only looking at what is remaining in order to give a return back to equity holders onto shareholders. And probably for you as an investor, you probably know or have heard that the two most known vehicles provide a return to shareholders or direct return to shareholders are in fact by paying out cash dividends or doing shap buybacks. But in fact, if I start with the first one on dividends, cash is, cash, dividend is the most known vehicle, but it's not the only one. And we're going to discuss tax implications of cash dividends after it's also do remember that cash dividends, it does not happen very often that growth companies or even startups are paying out cash dividends. What they're looking at is really the increase of the book value of the company and starting to become profitable for mature companies, you're going to see companies paying out cash dividends. But I said it's not the only vehicle. So there are some special onetime dividends. Maybe the company has done a huge profits, so they prefer on that year specifically to pay out more. You have scrip dividends. I do own telephony, Gauss's Spanish telco operator, and Latin America. They are, in fact, when they pay out dividends, you have both choices. Either you go for cash dividend or you go for descriptive and prescriptive easement is what the company is printing is giving you the amounts of cash by giving you a certain amount of new shares. So obviously by that the amount of outstanding shares is being diluted warrants. I have this flourish more because of the COVID response decided to do half-half last year. So instead of paying out to Swiss francs per dividend, they decided to pay one Swiss franc in terms of cash out to shareholders. And the other one, they took the liability of providing shares in 2023. So and they were giving you the opportunity of having those warrants that were calculated equivalent to having a cash dividend. So I have some entitlements, so original has a liability towards me in terms of warrants that I am entitled to have and to convert or to buy at a certain market price by 2023. So three years later, as this, what happened here was in 2020. You have some, you can have a property kinds of dividends Type. I have never seen this, but it's not necessarily cash that is being paid out. Could also be assets. Then you have liquidations in calculations. Now you may have the company that pays out liquidation dividends. And remember that dividends, you see them in the cashflow statement in the financing part. One thing and without going into the details, but for those who have done the value investing cause maybe the dividend investing and deep dive course. I do like to have while I buy a company and hope we are going to be able to buy a company at 25 to 30 percent below its intrinsic value. During the time that my money sit still, I want to have a passive stream of revenue. So we're going to be indeed looking out for companies that pay out nice dividends. And they are in fact companies who pay out fantastic dividends. And, but on top of that accompanies that increase the dividend yield year over year. I mean, not letters. And this morning we are mid February and Nestle Again announced that they would increase the dividends from 2007 Swiss Francs to 275 this fiscal year. And you have a lot of what is called dividend kings and dividend aristocrats who increase year over year Their dividend yield. So that's something that is also to be taken into account. Then the second one that has become a little bit more attractive since now, let's say 12 decade is share buybacks. And again, just to explain how a share buyback works, the company has an amount of diluted Warsaw. In this example I have 50, so it's a small amount, but consider it's the full amount, 50 shares and the equity of the company is 100 K US dollars. So one book value per share is 100 K divided by the diluted while so in this case 50 shares, that would give me a book value before doing the share buyback of 2000 US dollars book value per share. Well, the company is doing the company is, and imagine this on public equity on the New York Stock Exchange on Euronext is removing his buying back from the markets its own shares and buy that it's reducing the diluted Warsaw. In this scenario, imagine that the company is buying back 10% of its shares, so it's from 50 going to 45. The equity obviously has not changed. And by doing that, the what, what is the effect is that the earnings per share will artificially be increased because you are dividing the earnings by less shares as you have done. You have, you're doing a share buyback or the company has been doing a share buyback. And by that also the book value of the company has been increasing. And in this scenario, if the equity was 100 thousand US dollars, the company bought back five shares from the diluted while. So it's now dividing the same amount of equity by last shares. And obviously the book value has just increased my 11 percent to 2222 years dollars per share. And when, when we discuss share buybacks, one of the things that you need to look is not just companies that do share buybacks, but it happens. And I'm looking, for example, at US tech companies. They also use very often this is also done by in private equity is done often in venture capitalists. So instead of this done very often. But the company is printing out new shares because they use this as a way of either retaining talent or its way of an employee benefit on employee compensation scheme that they're using. And here's typically we speak about stock options. So when you look at share buybacks, you need to look at the total is what is net-net, the amount of shares that the company has been buying back, but also the amount of new shares that the company has been printing because they use this as remuneration scheme to its employees as an example. And this is where you need to be, let's say fluent in what we mean by equity dilution. It's equity dilution is that the equity is being diluted. One share is worth less in the future. So it would be the other way around. It would be the contrary of a share buyback. So the important point you, when you look at share buybacks, you need to look at both angles, how many share buybacks are done by the company and how many new shares are printed by the company. And the net between the two would tell you if a company is diluting the current value of one share or if it is increasing, it's because they are doing more share buybacks then printing new shares. And what you need to know. And I've put the division that is coming from Visual Capitalist where you see that in fact, buybacks, I mean, I do remember when I started 20 years ago, share buybacks was not necessarily something that companies were looking into at that time. If the company was giving a return to equity holders, it was most probably cash dividends or scrip dividends or warrants, but not very often they were really looking into share buybacks. But nonetheless, since, and you see in the graph the amount of buybacks that are being done. Here we're looking at SAP 500, for example, is really, really, really huge compared to how it was, let's say 25, 30 years ago. The mic question between dividends, you said that there are different types of dividends, not just cash dividends and share buybacks, is what do shareholders equity holders prefer? Well, in fact, I would expect that most shareholders would prefer share buybacks. Because share buybacks, the shareholder is not incurring a cost on the share buyback. It will just be the company to make it simple, one on the cash dividends, the company will incur tax or we'll have a tax implication. But as a shareholder you will also an I have also a tax implication. It's true and it's not part of this training that look at US markets, the tax implications or 15 percent, the Netherlands is 15 percent, Switzerland is 33 percent taxes due by it, 0% taxes. So depending on front is 19. So depending where you are, you're going to be exposed to more or less taxes on cash dividends. And, and it's, it's a trade-off between the two. And you have some companies who actually did do both. They pay out a cash dividend at the same time, they do share buybacks. And when you listen into Warren Buffett, he indeed likes share buybacks because he says that does not have any tax implications for me. And the company is increasing the book value of my shares. And I, I have nothing to do because the company is doing their share buybacks. So when we look now at the Free Cash Flow to Equity, So I said we are looking at dividends and we're looking at Shanghai Bank. So when you look at literature and even look at through books of Aswan Dam on Iran, you're going to see actually a couple of, let's say formulas popping up. And I'm adding one at the very end, which is my own one that includes share buybacks with dividends. Because I do see him in, I have a lot of companies and actually mix the two together. The most known Free Cash Flow to Equity, let's say valuation formula is taking the dividend per share and dividing it by the cost of equity. So it's pretty straightforward if your company is paying you out, I don't know, $2 per share, you take that amount, you divide it by expected return. Let's say that you want to have between 6, 7%. And this will tell you what the value is of a stock and then you can compare it with the market price. And you can see if the market price is giving you a depressed. So the market is depressed about the company. Or actually the market is very hard and it's evaluating the company. So it's astonishing to have such a simple formula allowing you to determine the value of a share of a company. But indeed it's pretty straightforward because here we are just looking at the cash flow to equity. So if you are a shareholder, you're, from a tangible perspective, you're looking at how much cash pre-tax is coming to you and dividing this by your expectations in terms of return. And we're going to practice this obviously on our four companies. Then when we look at dividend aristocrats and dividend kings, and I'm having this for Nestle Unilever. I owned a non, they actually increase year over year that dividends so that the dividend discount model does not work or will under, let's say, under estimate the real value of the stock. Because in the formula, It's not including the growth rate of dividends year over year. So the formula, the Gordon Growth Model is pretty similar to the dividend discount with the exceptions that you see, the denominator that we're gonna from the cost of equity, we are going to be removing the growth rates of the dividends year over year. It's true that if you have a company that does not pay out dividends, forget those formulas. It will not work. If you have a company that is paying out dividends flat for the last 10 years. And the strategy of the company is not to pay out or to increase the pay out a dividend payout. Well then you need to use the dividend discount model as one way of getting a passive return to your invested money. The one that I tend to use is what I call the total shareholder yield or the extended dividend discount model. Because we are seeing since the last 10, 20 years, more and more companies doing share buybacks and trying to increase our share buybacks on top of increasing the dividend. And this is what I, what I have with companies like Nestle, like Danone. That's not only do they increase the dividends per share every year, but they also have a clear share buyback strategic program to, yeah, we could say, artificially increase the book value of four the shareholder. But, but it's a way of generating equity holders. So here the formula would be not just taking the dividend on the nominator or the dividend per share, but adding share buyback Persia, and then dividing this as in the Gordon Growth Model by the cost of equity monitor growth rate as we are expecting dividends and share buybacks to grow in the future. So if you practice our eye now on Reshma and carrying and then after it's an apple and Microsoft. So remember, we were color-coding in the cashflow, so dark, so Black was the operating, red was the investing, and green was a financing. So you see here for really small and carrying that need, we have in the financing activities, we do see dividends that have been paid out. We do see as well some, let's say adapt paybacks that are happening. And, and also when they print out a new shares. We see, for example, for carrying the Treasury Share transactions. This is when they are buying back shares from the market. And the same for Apple and Microsoft. So on episode you see proceeds from issuance of common stock here they are printing new stocks, but you have a couple of lines below the repurchases of common stock for 72 billion US dollars. So you see that net-net, even though the company has been printing 880 million of worth of money in terms of new shares. They have in purchasing from the market 72 billion in 2020. And then you have, for example, the proceeds from issuing new debt repayments of term depth as well. And then you have also the payments for dividends and dividends equivalence. And you have the same from Microsoft. You see, you have repayments of depth. You have common stock issued, common stock repurchase, and then common stock cash dividends that have been paid out to here again, you see one dot one dot 3 billion of new. So that's equity dilution of new shares that have been printed so in common stock. But at the same time max of repurchase 22 billion of shares and they have been paying out 15 billion cash dividends to their shareholders. So now the assumptions and again on this free cash flow to equity model, you will need to establish a couple of assumptions. And remember we are in going concern valuation. So we are looking into and we have to estimate what are we expecting. The dividends look like and the share buybacks look like in the future. So when we look at, and I've done here the estimates for the our four companies which mall carrying app and max are from 20122020. You see that the growth of dividends form Reshma has been over the last few years at 5% for carrying. There were a lot of fluctuations, specifically over the last three to four years have drastically increase their dividends. But the average would be around 15 for Apple, they are increasing the dividends year over year by 3% in average, and Microsoft around 8%. Then also in terms of share buybacks. And here I'm doing the calculation on a per share perspective. So I'm taking the total amount of share buybacks or common stock repurchase that you will see in the cashflow statement in the financing part. And I'm going to divide this by the diluted while so, and this will give me a share buyback per share. And I see that, for example, for Rushmore, if I take the three average at 0 dot 08, so they are buying from one chair 0, 0, 0, 8 back. And when you divide this by the SharePoint, that gives you yield for carrying, it's 123 for average 200, three, and 39. So net-net, what does this mean? If we take, and here, I've been taking just as a market average, I was using 821 as cost of equity, removing the banks. And if a look at how much dividends they have been paying out. And that was then calculating this on the latest dividend per share. So dividing this by the diluted while so the dividend growth. And I've just estimated looking back at history and then also the share buybacks per share. And this is giving me on the three models. So first on the dividend discount model, the intrinsic value of Reshma, if I would only look at Free Cash Flow to Equity, it would be 20, 157 on carrying would be 1906 46, and Apple would be 10 dots ten. Unlike so it would be 24 dot 91. Obviously this is very, very far away from their share price. When a look at Gordon Growth Model, because some of these companies, they do indeed increase the dividends year over year. It would have been 56. For Reshma, it would have been a negative figure. So here need to be attentive that what happens is that those models do not work when your cost of equity is smaller than, if you look back at the formula than the growth rate. If the growth rate is higher than the cost of equity, you, you may end up with a negative figure. And this is exactly what is happening with carrying and Microsoft. So how shall we interpret negative figures? Well, it could mean that the company is worth an infinite amount of money per share, which is obviously, I mean, this is theory. It will not be like this, but definitely you are not able with Free Cash Flow to Equity to calculate the figure outside of the dividend discount model for Microsoft and carrying, because the Dividend Growth assumption that we are having are too high versus the cost of equity. So either you increase the cost of equity, which is already high at age 21 percent, are you just reduce your growth assumptions and then probably if you're below age 21 for carrying and Microsoft, you're going to be indeed having a positive figure there will probably be higher than the dividend discount model. Because remember the dividend discount model is dividing the dividends per share by the cost of equity by 821. So with whatever you are, what you subtract from age 21, you will always have higher figure than the dividend discount model if you see what I mean by that. And then the total shareholder yield, this is when the company is doing share buybacks. So obviously with Reshma, as they are not only paying out dividends and there is a dividend growth, but on top of that, there is share buybacks of $0.08 of Swiss francs on a share. You see that the total shareholder yield is giving us the highest intrinsic value at 59 dot 16. Obviously with carrying max of same story as we were already negative, as the dividend growth was higher than the cost of equity. Maybe we need to review our assumptions on the dividend growth. But otherwise, obviously, the shareholder yield should normally be the one that is the highest versus Golden Growth and gone world should be higher than dividend discount model. With the only exception in the company is printing out more shares than it is diluting one. And this is something I have, for example, for Telefonica. They do not do a lot of share buybacks, but they print out a lot of new shares because of the script dividend scheme that they have instead of just paying out cash dividends. And so if, if I change the average cost of equity and I use a whack 0 depth and at the same time I use, I have a WACC of 6% on equity. We see, and you remember that? I am okay with six to 7% year over year. And you see how the price is obviously change. And we see that for example, for Rushmore, the share price for reasonable safety margin with the WACC of 6% was 45, 50, 195 for carrying 1974 Apple and two hundred and forty, two hundred and fourteen for Microsoft. And you can then also compare with what Morningstar is giving. So that's the kind of thing that you need, again, to do your adjustments to say how do I calculate this? And obviously, what you have to bring in at a certain time, you need to bring in all the calculations that you did. It was with a WACC of 6%. And what would be the safety margin? You see here? Without the safety margin, I was considering the fair value of rational thought to be at 78 dot 40 Swiss francs. So that is before the 25 to 30 percent when I was buying at around 55, 56, 57. Indeed, I was if I was using a WACC of 6%, I was actually having my safety margin and this is where I bought more activity seven plus I received passive revenue streams having dividends plus warrants. And the market brought it up at more than 85. I decided to solid. It's now today at around 86, 87 Swiss francs. And that's something that you can do for all your calculations. But now here we have been looking into multiple methods. And before going into relative valuation, I want to wrap up this absolute valuation chapters because we were having remembered two chapters. We had one chapter that was asset-based valuation to as base violation was looking at market cap, was looking at book value, was looking at adjusted book value. I adjusted net asset method. We were looking at liquidation value. And then now in this chapter, we were looking at a going concern variations and we're looking at multiple, multiple, multiple times earnings methods. We were looking at free cash flow to the firm. We were looking at discounted future earnings. We were looking as well at Free Cash Flow to Equity with Dividend Discount Model, Gordon Growth Model, and total shareholder yields. But the point now is that when you have done all those calculations and this is what I'm doing. I'm doing multiple calculations. I got to end up in a range of intrinsic value. And this is what I'm showing you here now with Reshma. So stay with me. Let's say five more minutes before we wrap up this because this is important to understand. So what I'm doing now here is, first of all, I have cash available. I need to decide if we should know as a good buying opportunity yes or no. The current share price is 6455. That's what the market is telling me today. What I did for Reshma. Remember looking back at Chapter number 2, I have been adjusting the book value per share. So because I believe that land was not carried or as land was carried at costs, there was an understatement of the balance sheet. I was looking also at the brand value. So the intangible assets were understated. So here I will not be looking at book value per share, but are going to be using adjusted book value per share. So I'm considering the book value of the assets per share is 43 dot 99. Then you remember we were discussing the multiple earnings valuation per share. That is giving me an intrinsic value of 790. That's already a going concern. And when I look at the intrinsic value, undiscounted future cashflows for 30 years. It's giving me 42 intrinsic value, undiscounted future earnings. It's giving me 30, which means that probably they have been investing a lot. This yet is why there is difference between the cashier and the earnings this year. And then I have my Free Cash Flow to Equity, three formulas. I have the dividend discount model, the Gordon Growth, and the total shareholder healed. It would not make sense. And this is why the dividend D, DM and the Gordon Growth and empty. It does not make sense that I bring those into the equation. Why? Because Reshma is doing sharp imax historically. So what I will need to look into is the amount of dividends, the growth on the dividends year over year, and I need to add the share buybacks. That is why I'm only using the share of the total shareholder yield formula and not the DTM on the Gordon Growth because I would limit myself and I would not have the share buyback in the story. Or if I would just use the DM, I would not have the dividend growth year over year in my story, in my calculations. So this is why I'm removing book value per share because our continent, the balance sheet is understated because of land and because of the brand value. And I'm not calculating EDM and gone growth because Reshma is increasing the dividend year over year and they are also doing share buybacks. So this is giving me on the target shareholder yield an intrinsic value of 5916. And you see here that intrinsic value, depending on the method that you are using, it, you will have to think in terms of range. And this is also what Warren Buffett is saying. You are going to be adding up in a range where you believe that the company is overvalued, the company is fairly valued and the company is undervalued. So if a kind of put that together, it's kind of telling me that are above 6768, I would consider the company starts to be overvalued and that below, let's say around 5502, that the company is being undervalued with the safety margin of 25 to 30 percent. And then the fair valuation of the company is between somewhere 55 and 65. And again, when the crisis happened and Reshma went down to between 55 and 57, I decided to buy because I was calculating, depending on the methods that were being used, I was at that time estimating that more or less a fair valuation of the company who would be around 70, something like that. So I had enough safety margin to buy between 55 and 57, and this is what I did. So if you look here and I've taken here from trading view of my graph, I bought rational in the middle of the crisis. I bought it at around 55, 56 Swiss francs at that time. At that time, remember that intrinsic values have to be revalued because earnings and cash flows change. But at that time I was estimating the intrinsic value of the company to be at 70, so 700 Swiss francs. And I was estimating, and this is my style of investing that above 81 Swiss francs, it was overvalued, so that was my 15 percent overvaluation threshold. And this is for me the signal that are going to be selling the company. And I sold at around 85 because I felt that I had a pretty decent return of more than 60 percent without dividends and without warrants over nine months, which I think is pretty okay with the amount of money I've invested. So I've bought in April and absolute in January. And yeah, and I was happy with the return. I was having him in 60% in nine months. That's close to a 100% return over a year, which is definitely much, much, much higher than inflation or T from the US Treasury. And so this is the kinda thing that you need at a certain time to bring in is to think there is not just one test I have to do to estimate the intrinsic value of the company. I need to look at adjusted book value. I need to look at multiple earnings. Maybe I need to look at discounted future cash-flows, discounted future earnings. I need to think about cash dividends and share buybacks. And this will give me an average valuation of the company. Here you see how I was calculating it. Flourish more carrying up and Microsoft are saying, okay, the average kind of average point of median point if independent of the method is at 66 for Reshma, 229 for carrying, 74 for apple and 125 Microsoft. And then with that, obviously you need to think, Okay, is the market giving me over relation on the valuation? And if the market is giving me a price that is overvalued versus my judgments. Then I just say, No, thank you. I just got to wait or maybe put my money somewhere else where the risk of not having my expected returns is just lower. And this is the way how I want you to think as an investor. So that's wrapping up chapter number three and wrapping up with that, the absolute valuation methods that we saw in chapter number two on acid-base variation and chapter number 3, ongoing consumer relations. And then in the next chapter we're going to look into relative valuations, which is most known by a lot of investors. And we're going to be discussing price-to-book price to cash flow, price to earnings, price to sales pack, enterprise value, those kind of things. So I hope it was interesting and looking forward to talk to you in the next chapter. Thank you very much. 13. Why Relative Valuation and Price to Book: All right, In esters chapter number 4 and looking at relative duration. So remember that Chapters 2, 3, and 4 are really the core of this course. We started with Chapter 23, which are related to absolute valuation. Remember Chapter 2 was acid-base valuation not looking at future earnings and future cash streams of the company. Chapter number three was going concern valuation. Remember this accounting term where we are looking indeed at with some assumptions, what will be the, what is intrinsic value of the company taking assumptions on future growth of the company over a certain period of time. In my style, it would be 30 years. And now we're going to be looking at relative valuation. But before we go into price-to-book, which we'll be discussing in this lecture, just a short intro, Y, relative valuation actually exists. So the relative valuation, and probably, I mean, when you look at some investors that start becoming a little bit serious and not just put their money because they're looking at technical graphs or because they read an article about a super-secret company that will multiply the revenues by 1, 0, 0, 0, 0, 0, the investment by 1000. Relative valuation is something that a lot of investors, and I actually started with that as well 20 years ago when I was looking at relative ratios and the advantage of relative valuation, it's a quick and effective way of evaluating, accompany. And even more interesting, if you're going to have rages where you can benchmark one company versus an other or one vertical industry versus an other. So we're going to be discussing in relative valuation, specifically price to book, price to cash flow, price to earnings, price to sales. Then we're going to look at peg and also everything that is related. So relative relations of enterprise value to EBITDA sales and revenue. So one thing's already to state here is, remember this is a course about company valuation. We will be discussing here assets Chapter 2 and 3, acid-base validation and going concern valuation. Now relative evaluation, the purpose of the training is not to look at financial health. That's something that we are looking in the value investing training where I'm discussing, or for example, I do look into debt to equity, for example, I do look into dividend payout and total shoulder yield payout ratios. And if they can, we sustain over time, I'm looking obviously at profitability ratios and the one I'm most looking at is a return on invested capital and the written on that tangible assets. So those are the kind of things I do look into, but we will not cover them in this course because that's not or they are not value unrelated. They are just financial health and profitability related ratios. When you stigma or a relative valuation, we are typically and you're going to see also in the professional press, we will not be discussing price to book, price to cash flow, price to sales and price to earnings. Price to earnings. Everybody is speaking about price to earnings, or the inverse ratio, which is the earnings per share. Similar to what we did in previous chapters, I'm showing you where we find the information necessary to calculate, for example, price-to-book, we will need to look into the balance sheet price to cash flow. Obviously as it already kind of states, we are going to be looking at the cashflow statement. When we're going to look at price to sales and price to earnings, we're going to be looking at the income statement. So you see that those ratios really look at different financial statements or financial documents. And obviously, when we are in the public equity area, we're going to be looking at what Mr. Market is giving us as a share price. We are, when we are looking at private equity, we're going to be looking at what the seller of the company, he or she wants us to buy the company and at which price they want us to buy the company for one single share. That's the kind of thing. So those kind of metrics also do work for private equity, not just for public equity. So before we go into price-to-book, just one important thing I want you to have very clear in your mind because a lot of people, and I'm discussing this as well in the value investing training. When, how you interpret price to something. So when you interpret a price to book value, you are looking at what the company is worth. So the stock of wealth that the company has been creating since its inception, that's the purpose of the balance sheet. While income statement and cashflow statement you're looking at a period of time can be a quarter, can be a month, can be a week, can be a year. So when you look at price to book value, you're looking indeed at the current asset of the company. The company is worth without looking at the future streams of revenue of that company. When you're looking at price to earnings, price to sales, price to cash flow, you need to interpret it the following way. As an investor, you will be buying a certain amount of years of x and you replace x by earnings, by sides, by cashflow. And obviously you need to think how predictable is that future and the consistency of the ratio of the earnings of the sales and the cash-flow. And let me just give you an example. The if you're buying a company which has a price to earnings ratio of 100, it means that the company with the current, let's say results, the current earnings, you are buying 100 years of earnings. So its price to the last yearly earnings can also be the price of the last quarterly earnings were typically price to earnings. We're looking at 12 months. Sometimes it's trailing 12 months with a sliding window of 12 months. And sometimes very often looking at price to earnings at full scale, so on full fiscal year. So keep this in mind. I mean, when you're buying a company at the peak of 100, you're buying 100 years of current earnings. Of course, if that company is growing at a 100 percent year over year, and remember, this will not happen for 30 years. Otherwise it would outgrow probably the US economy. But a certain moment in time, those growth assumptions will flatten down. And so just be mindful when you buy companies with the P of 100, what it means, it means you are buying 100 years of earnings. And after those 100 years, you will get your money back because if you buy that company at the current price versus the current earnings, and that ratio is 100? Yeah. Paying an amount of money for a 100 years of earnings moving forward, will you ever see that money back? Well, it depends on the growth assumptions of that company. I would not invest into such a company that has a P of 100. So when we look at those ratios, industries share of my investment style, we have been discussing book value in the acid-base valuation already. And there was already showing the price-to-book relative valuation. And I do like to invest into companies that have a PB below three, even sometimes below 15. Remember one single test is not enough. You need to look at multiple tests. And not just as the base relation need to look at going concern, variation and also relative relation to find out if the market is really depressed and you have a great purchasing opportunity or there is something going on with the company and you should stay away even if the PB ratio is very low. Price to cash flow is for me there is something that is very close to price earnings. Remember that I consider that cash-flow and income, so earnings will at a certain return reconcile. Remember, we were discussing the car renting versus the car investments. The cashflow, you may be hits one on the cashflow, but you will see this revenue coming back from an depreciation over a certain amount of years. And so at the very end after that period of time, you're going to have cash-flow and earnings reconciled. So I can tell that price to Kathryn, price to earnings should be similar. So I do like to buy below 15 years of, let's say, a future earnings and future cashflow. Price to sales. There are some people who do like to look at price two says I do not, but typically also here the ratio would be below three or below one, not five, but I consider it's like the multiple and revenue methods. I mean, invoices don't mean anything. What counts is when you send out an inverse, how much profit you make out of that revenue. So this is why I do not look at processes will cover it nonetheless in this training, but it's something I do not like. So the point I wanna make here as well, It's first of all, the interpretation of it. Typically the price to earnings, you are buying an amount of years of acts of earnings. So just be mindful about that and also be aware of value traps. I mean, I'm speaking mothers in the value investing training, it's not part of the company evaluation training that you need to look also at revenue and income consistency. If the revenues and the incomes are going down since ten years, obviously the ratios will be low and probably the market is already depressed about that company and it's not a good buying opportunity because this is what we call a value trap. So EVA, the company does a pivot, which may happen, and then suddenly there is again growth phase in the company, but otherwise maybe the company will just die out. And there are a couple of examples of companies that were those kind of things may happen. So just be, be, beware when you have those price to book, earnings, cash flow and sales ratios that appear to be low. The risk of just looking at relative valuation. I actually will increase there is that you're investing into value trap to have a look at asset-based valuation, have a look at going concern variation, and do look at the consistency of revenue and income over the last at least five years. And if if the revenue and incomes are consistently, consistently going down, maybe just stay away from the company and wait until we have another company that you like that doesn't have those kind of attributes, a value trap attributes. So I said this lecture is about price-to-book, but it was for me important to introduce the Y relative valuation. So when we look at price-to-book and if you have done Chapter 2, the asset-based valuation part, you remember that I was explaining and this slide, you've seen it at that time, how you calculate book value per share. So basically, the book value is the equity value. So we have assets on one side, you have liabilities that are either credit holders or that our equity holders. And the book value per share is just you have your assets, you remove the liabilities from it, and what remains is the book value of the company. And then you divide by the diluted wass or so diluted weighted average shares outstanding. And this gives you a book value per share. If you compare now the book value per share with the current market share price. So this is what the price-to-book ratio is doing, is you take the current market share price. This works for public equity. When it is private equity, just look at what would be the person trying to sell you. The company would be pricing one single share and you compare this with the book value of the share. And this will give you an idea if the seller, if it as private equity or public equity is over understating, overvalued in on the validating the company. What I can tell you from experience is in private equity, you will not have people that will under evaluate companies. You're always going to have people that tried to sell the company higher than what the company is really worth in public equity on when there is a market correction or bear market, you're going to have fantastic opportunities to deploy your money and earn nice returns on that money. So I think again, I know I'm repeating myself, but it's really important if you are serious investor, that you not only look at one ratio or two ratios, but you really need to have a consistent story. And if you do my value investing cause you see that I'm using at least 10, let's say tests to have level 1, level 2, and level 3 tests to determine, okay, is this a good buy or not? And and so Pb asset I do like on the PB is below three, even below one No.5. That's, that's very interesting. And remember that ratio can vary from one industry to the other. And because just the, let's say the liability side of things as different way how capital is brought in is different. You may have an industry that is very capital intensive, where automatically the price-to-book or lower versus an industry where the equity, or sorry, the capital requirements from a creditor perspective are very low and there is another rid of capital intensity to it so that the price-to-book actually, uh, will be, will be higher. So always be mindful about that. And, and again, I said, do not use please only one task to put all your money or your savings into it. But, uh, price-to-book can be interesting as one of multiple tests. And just go into my value investing cause look at the level one, level two, level three tasks. And I believe honestly, and this is how I've been investing since 20 years, that this will most probably avoid you very big mistakes if you follow kind of those, those big rules that I'm explaining there. So if we bring this bag and we did this already in the acid-base valuation to our four companies original carrying Apple, Microsoft. So just repeating myself here, but it's a good refresher. So again, the price-to-book ratio is we take the current market share price, that's the upper red frame. So we have 64, 55, 567 for carrying, 11869 for Apple and 223 dot 72 for Microsoft. At that time, I was doing taking all those data points. And here I was just taking the book value per share. Remember in Chapter 2, we had authored the book value. I was using the adjusted asset method or the adjusted book value per share method. I'm I'm was just taking here for the sake of the example, the standard book value per share. I'm not adjusting land at cost. I'm not adjusting the brand value of those companies. So the book value is 36 original, 82, 66 for carrying, 385 for Apple and 563 for Microsoft. When you compare the current share price versus the book value per share, you end up at EPB of 250. And for Reshma, 607 for carrying 30 dot something for Apple and 1432 from Microsoft, as already sets here when I was explaining this in Chapter two. Indeed, the Reshma was on those kind of tasks on the book value per share and the price, book, price to book ratio was showing some kind of undervaluation by the market, which was a signal for me. Can you just go deeper into it and trying to find out what is going on with rational. If it is Joseph, the market is depressed and again, re-explain. This is what indeed happens is that I bought at between 55 and 57 Swiss francs, and I started off nine months later at 85 percent. And then I added dividends and some orange to it, which was more than 60 percent written in nine months, which was occasionally, I think. So wrapping up the price to book a relative valuation methods and asset. This was the first lecture in chapter number four. In the next one we're going to be discussing price to cash flow. Thank you for your attention. 14. Relative Valuation - Price to Cash Flow: All right. In SR, so I come back seven chapter number four. In the relative valuation chapter we're going to now be discussing after price-to-book, we will be discussing price to cash flow, which is a less commonly used relative valuation ratio. But nonetheless, I believe it's an interesting one. So remember, when we were discussing cashflows, we're looking at the cashflow statements. And remember they were, we were using color codes, were using the black one for the operating cashflow, using the red one for everything that was investing and the green one which was financing, remember as well in the previous chapter when you're looking at going concern, we were introducing the free cash flow to the firm. So that was the shortcut, the operating cashflow plus the investing activities. And very often the investing activities when negative if the company was investing into long-term assets. And that was a free cashflow that was remaining to payback that, but also to give some return to equity holders. And we also introduce a Free Cash Flow to Equity. So that was the similar like free cash flow to the firm, but with a difference that we were adding depth to repayments to it. So that was the cashflow that was free, freely remaining to the board of directors to give a written only to equity holders. So the creditors that polis were already paid back. When we are looking at free cashflow to equity versus free cash flow to the firm. So when we look at price to cash flow and it's very interesting, ratio I do like to look into. It's a financial multiple that compares the market capitalization to its operating cashflow. And I do prefer it. And a lot of people, I mean, serious investors, they do like to look at price to cash flow versus price to earnings. They preferred the price to cash flow versus price to earnings. Why? Because you cannot so easily manipulate the price to cash flow versus the price to earnings. And, and there is a conversation about when we calculate the price to cash flow. Are we looking at operating cashflow? I were looking at the free cash flow to the firm. I mean, most analysts, they, when they calculate the price to cash flow, they calculate the price to operating cashflow. So they're not looking at investing activities. Remember that in the operating activities, we do have also taxes that are paid that is part of the cashflow as well of the operating cashflow. I do tense. I do like I have personal preference of looking at the price to free cash flow. So I add investing activities into it as well. It's a price to free cash flow to the firm if you're a member. And the interpretation of it should be the following. It's similar to the PE ratio, what I just said in the previous lectures. So the price earnings, you are buying a certain amount of years of cashflow. Let's assume you decide if you want to, if you want to calculate the price to operating cashflow or price to free cash flow to the firm. But if you buy a price to free cash flow to the firm of 100, you again by 100 years of free cashflow. Except if the company would have an incredible growth over the next couple of years, you will be otherwise you will repay 100 years of earnings moving forward. And even if the company would be organically growing at 2%, you will still be buying 70 years of earnings moving forward, uh, similar to the price to earnings ratio, I do like to have a value, if possible that is below 20, below 15 on the price to free cash flow. Because indeed I consider that mean. I'm, I'm, you know, that I'm investing learning to blue-chip companies. And a lot of those blue-chip companies have more or less organic growth rates. So they will grow between, let's say three and 56 percent year over year. If I buy now Earnings and I bought or cashflow, I buy, let's say 15 or 20 years of earnings. If I add this three to 6% growth rate into it, are going to be buying around ten years of future earnings, which is for me, Okay, Ish to buy. Probably the companies I'm investing into there will still be around in 30 years time. So the maximum period of 10 years, even if the, there would not have been a price appreciation by the market. Because remember, I'm buying 25 to 30 percent with a safety margin. So below the intrinsic value, I will be fine having a return on my money back after 10 years. Because I buy a ratio of 15 to 20 with an intrinsic growth, organic growth assumption of three dots, 6%, which actually tells me I'm going to buy ten years of earnings moving forward. And when you look at our four companies, there's Reshma carrying. So for this, for the sake of the exercise, we are going to be doing a prize to operating cashflow, but you could do a price to free cash flow to the firm as well. And you have sites like Reuters.com. They provided the two measures of the price to operating cashflow and the price to free cash flow to the firm. So here if we look at the operating again in black here you see that the net cash generated from operating activities is on the left-hand side for Reshma, we have it for carrying on the right-hand side. So it's two billion three hundred seventy four wish mine 2020 and two dot for 75 in 2019 for carrying for Apple and Microsoft the same, you will have the cash generated by operating activities for Apple. On the year ended September 2020, they were generating 86 billion of cash from operating activities. And non-Microsoft, they were generating 60, 66 billion of cash from their operations. If we now summarize, as you know, these tables in the meantime, while I tried to summarize Reshma carrying versus Apple and Microsoft. And we, we do look indeed at the current share prices have not changed. So 64, 55, 56, 57 for carrying, 118 for Apple and 223 for Microsoft. You have a diluted Washoe as well. And if you look at the operating cashflow, the one that I was just using, and I'm calculating the operating cash flow per share. So that's kind of how much one single share has been generating in terms of operating profits. And we bring this now to the price to cash flow where we take the current market share price divided by the operating cash flow per share. You see that the Reshma at that time had a price to operating cashflow of 13. Remember I was buying wish at 57. So at that time the PCF was probably below ten when I bought Reshma. Carrying at 40 seems high. Let's be very honest about it. Apple at 24 is still high in terms of range and maxval 25 as well. And so probably if the, if the price of Apple, Microsoft would go down maybe to 100s for Apple and Microsoft to two hundred, one hundred and eighty, we would most probably be in a range of price to cash flow that would be in this window of below 20, below 15. But again, one ratio, one test is not enough. You need to look at the whole story. And again, the same here on carrying. It looks like with the PCF of 40, that carrying appears to be overvalued. And you remember in the previous lectures when you're looking at carrying, looking at free cash flow to the firm, looking at, at book value as well. We did, well, we have a feeding indeed that carrying was overvalued by the market. So even though I like the brands of gucci of if santa of carrying, for the time being, I'm just gonna stay away from it because I take the risk of buying a company there's overvalued and where the market at a certain point in time, we'll do a correction down, maybe given the current assumptions that I do know. So I prefer then maybe to invest into other companies that appear cheap and original was a good alternative because I wanted to invest into luxury, luxury brands. So with that wrapping up already priced or cashflow. And in the next lecture, we'll be discussing price to earnings. That will also be a short lecture. Thank you. 15. Relative Valuation - Price to Earnings: Right, investors next lecture in relative valuation, one of the most known ratios on the market, this famous price to earnings ratio and related earnings per share ratio. So let's go into it. So I mean, as you have already have seen its abbreviation, It's PE ratio and is really the most use relative variation multiple. If it is on Bloomberg, on writers and all the financial sites. I mean, people all the time speak about these PE ratio and also the contrary, which is the earnings per share. So I again, I mean, consider that the good ratio, good PE ratio is below 15, even sometimes below 10. That's great. Again, remember, and I've seen so many people just because they have understood what p is and they will not just looking at technical grounds, they put all their savings into company because the PE was low. So remember, please be aware of that, that you need to take investment decisions based on more than just one single ratio. I can't just don't know how often I will have to insist on this. That people tend to become, even sometimes when they're successful, become arrogant, and just put aside their homework. So you need to look at more than just a PE ratio. Need to look at more than just price to cash with the price-to-book, you need to do a compelling story about the company. The already I was sharing in the lecture, in the first lecture of Chapter number 4 is interpretation of the piece. So it's its price to yearly earnings very often. So you are buying a number of years of earnings. So how predictable is this? And specifically if you are buying, as already stated in previous lectures, a PE of 100, you are buying 100 years of current earnings asset, except that the company has a crazy growth rate of 35 percent year over year. That P E ratio of 100 today will actually reflect maybe ten years of earnings because this growth, I mean, there is an acceleration in the growth and earnings will increase as well. But, but just be mindful about that. And I set my personal investments done as a value investor. I do like similar to price, the cashflow ratios to be below 20, below 15 if possible below 10. And beware of value traps where I already said is please look at earnings consistency or earnings inconsistency. Just look if revenues are going down. If earnings are going down since the last 10 years, there is something about the company. This could be a value trap and you should maybe just keep that money and wait. Maybe pile up that cash and deploy that money or allocate your capital somewhere where you're going to have less risk of deploying your money. So, so again, the price to earnings is you need first to establish the earnings per share. The earnings per share is typically the net operating profit after taxes and you divide this by the diluted, diluted weighted average shares outstanding. This will give you an EPS value. Then you take the current market share price and you divide this by the earnings per share. And this will give you the PE ratio of very straightforward. And so most investors in need, they use a net operating profit after taxes. In the financial reports you will also often see specifically in US gap company's net income attributable to common shareholders. And you know, sometimes you're going to see as well other terms being used like the trailing PE and the forward PE. And the trailing PE. I mean people, and specifically, I mean most of the companies that are on public equity, and they are listed as public equity companies, they have to provide quarterly results. And so when you are in the first quarter, the second quarter, I mean, those earnings have to be calculated into brought back to an annual basis. So what analysts like to do, the second quarter has to be brought in. They going to take the second quarter of the current fiscal year, the previous quarter. So quarter one, Q4 of the previous fiscally and Q3. So that's the trailing PE. And typically we are looking at a sliding 12 months. If you would be now having a company that is publishing it's Q3 results. You're going to, if you're going to look at the trailing P, you're going to take Q3, Q2, Q1, and Q4 of the previous fiscal year. The thing what you need to be mindful about is always think about seasonality because potentially there's going to be differences between 11 quarter versus, versus the other quarter because seasonality aspects play into, and this is where a trailing P can be interesting because it kind of offsets those seasonality effects. Like for example, in retail you have Black Friday, that's a cue for events. And the holiday seasons of the Christmas period, that's very strong period for retail. So this is where the training PE, if you're now in Q3, you're going to have the Q4 of the previous year, for example, for PV, this is really looking at future PE taking into account also some growth assumptions. What I've put here is aside, there is sometimes interesting to look into is the finance dot yahoo.com site where actually they have a finance calendar where they, I mean, they kind of compound and consolidate all the earnings per share estimates that analysts I expecting. And then when the company is reporting results, you see the reported EPS that is being filled out by the Yahoo team. And then you have this surprise metric where you see if the versus what the analysts were estimating, how the real EPS is there, how they were reported if they were above or below the estimated EPS? And when you look at Reshma and carrying, so when we look at no paths, typically, you have it here. The total comprehensive income attributable to the shareholders, 1, 16 to 4, Reshma to 160, 639 for carrying, you see actually as well and you have it there. This flourish more or for carrying, they calculate or the precalculate already, already the earnings per share and even sometimes a fully diluted earnings per share. For Apple and Microsoft, you have the same. Just look. First of all, in the red frame, you have there the net income and you have the earnings per share basic and diluted that are already pre-calculated for you. So this is pretty straightforward. And you see, I mean, they are pre calculating it because everybody is looking at EPS and price to earnings. So this is where you need to always things is like price to earnings. It's the most used relative valuation, let's say benchmark ratio. But what does it mean in terms of interpretation? You're buying an amount of years of earnings. And you need to think about what I'm buying, my crazy buying so many years in advance of earnings except if something is going on with that company that has 50 percent growth rate for the next ten years. Or evidence organic growth rate, which is more my style of companies I'm investing into. Then indeed, I prefer to have companies are below 15, below 10 if possible. But again, one ratio is not enough. Sorry for repeating myself, but that's really, really, really important. I really insist on that, but do not put all your savings just because it seems low. And, and if we bring this now to reach more carrying Apple and Microsoft, with the earnings that I took from the income statement. Remember the earnings were looking at the income statement. We see that we have earnings per share that are calculated and we have the price to earnings ratio is 3090, carrying is 33, 000, seven, Apple is 35, and microbe is 38, which at that time appear to be pretty high. Price to earnings. One of the thing. And you need to be awesome mindful about that. And when you have the earnings going down because there is COVID-19 for example, obviously the PE will shoot up because earnings are very small. So obviously the price to earnings denominator being small, the PE will grow. And this is the effect that you need to be mindful about. So sometimes it can be interesting when you calculate the price to earnings instead of just looking at 12th training months. Because there is maybe an exceptional situation like the COVID, maybe you can decide to take three year averages as an example and you're going to see the price to earnings going down because probably the earnings if it's a good company having more consistent pre COVID situation. And then when you remember in the previous lecture, and I'm trying here to bring the whole story together. Press to book price to cash flow, price to free cash flow and price to earnings. I mean, you can calculate this. And so when you combine this together, you clearly see that the price to free cash flow is closer to the evaluation and this is logical and this is why I said earlier in the previous lecture, I prefer to use price to free cash flow because I include investing activities into it. When, when analysts look at price to cash flow, very often they just look at past to operating cashflow and I'm saying, But guys, that's not enough. I mean, they're invest in the company is cashing out, is, is decreasing their cash position because they are investing into long-term assets. And this is where I prefer to use a price to free cash flow. And, and, and this is again where judgement is required. You see that price to cash flow seems low for a Reshma, free cashflow, 24 000 001, price-earnings 390. Remember that those ratios change every day because the share price will be changing. When I bought Reshma at 55 to 57, I was kind of okay. I think I was at a price to earnings and price to two free cashflow below 20. I was pretty sure about that. And my price-to-book was okay. And my intrinsic value on Free Cash Flow to Equity dividend discount model, it was Tokyo Shambhala, It was okay as well. So I had the earnings were not decreasing over the last 10 years. The company was consistently making profits. And so the story was consistent to me, I did not see too much risk of putting our money into Reshma. And again, the market corrected it and the market is now giving rational at 87 in mid February 2021. So in that wrapping up the price to earnings, so we have looked into price to book, price to cash flow, price to earnings, and in the next one, and obviously I've put this on purpose as the last one of the price to relative valuation ratios is the price to sales already mentioned. It's not one that I look into, but nonetheless, I want to walk you through so that you are, let's say, complete invest and you understand how to do the interpretation of the price per sales similar to the multiple revenue method we had when we were looking at absolute valuation and going concern valuation was at that time, I was already stating between the multiple revenue and the multiple earnings. I prefer the multiple earnings method instead of the multiple revenue because for me, inverses, they do not mean anything. It's the profit of those invoices. That means something on the profit, on the margin, on the revenue that the company is generating. That means something to me. So nonetheless, we are going to be discussing processes in the next lecture. Thank you. 16. Relative Valuation - Price to Sales: All right, investors continuing our chapter number phone relative valuation and we are going to be discussing price to sales relative valuation, which is also a ratio that sometimes I do hear that people like to use. So before I comment on it, Let's just define how you calculate price to sales. So basically what you do is first of all, need to determine the revenue per share. You take, the amount of turnover, the amount of revenues. So that's the amount that the company is invoicing to it, let's say to external customers. And you divide this by the diluted weighted average shares outstanding. So this is giving you the revenue per share. And then in order to calculate the price to sales, you're going to take in fact, the current market share price, which if it is public equity, you need, you need to look into if it is Nasdaq.com on the New York Stock Exchange or the financial sites that are giving you the daily or even minute or second-by-second market share price risk private equity, you need to look at the price that the seller is trying to sell you, the company. And you divide this by the revenue per share. And this is giving you a price per sales ratio. And the where price to sales can be interesting. And this is an, I'm not a growth investor, I'm a value investor and I'm investing into companies that print money that have positive return on invested capital. But price to sales is interesting. When the company has negative earnings and the company has negative cashflows. You could use price to sales to value a growth stock. That's one of the, let's say only scenarios where personally I would maybe consider looking at price to sales. Because if I'm looking at dividend discount, so free cashflow to the equity would be obviously negative because I have no dividends, I have no sham buybacks. If I would be looking at free cash flow to the firm, the cashflow will be negative as well. I would at least hope that the operating cash flow will be positive, but probably the investing and the financing will be higher than the operating cashflow. So at the very end of the day, I'm destroying cash. So these were called the cash burn rate. And suddenly I need to go through a new series of investments to bringing in new capital to be able to continue my operations. So it can be interesting to look at the price to sales in some very, very focused and narrow scenarios. This is at least how I would interpret it. But as I said in the previous lecture, I never look at price to sales in the investment universe, which is blue-chip companies, top 100, top 200 brands in the world. They print profits, they prints money, and they have positive return on invested capital hopefully above or closer 10 percent year over year. And this is where I would more look at price to book price of free cashflow and price to earnings instead of price to sales. But you can nonetheless calculate them. So let's do this for all four companies. And we are consistently practicing those ratios for rational carrying. Apple and Microsoft and here, so the information that you need is you need to have the revenues. So how much invoices has the company been sending out and you don't give a damn about the margin on those invoices and the cost associated to that revenue. You just look at the top line. So the revenue. And so Reshma has been generating in the last fiscal year 14 billion of revenue carrying 15, 8, Apple 274, and Microsoft 143. If you bring this down to revenue per share, so you have the diluted while, so that is in the second line. And then you have also the current share price has remained unchanged for the whole course. So this giving us ratios. So you said the price to sales of Reshma is 2060 of carrying its 451 of apple, it's seven or 34 and Microsoft 11 dot 104. So if you would like an hour stating in a previous lecture that it's interesting to have a price to sales that is below three, below 15. The only one that would potentially qualify as being undervalued, if you would purely look at price to sales, would be Reshma with a price to sales of 60 from the current assumption that we have versus the current shepherds of 64. Remember, I bought it at around between 55 and 57. So probably the processes would have been closer to something like two dot-dot-dot most probably. But but just be mindful about it. I mean, price to sales for me doesn't mean anything, but maybe for you in your investment style. It could be interesting, specifically if you're looking at maybe private equity or even venture capital and you're looking at companies who have negative earnings, we have negative cashflow, who don't have any positive. So they have negative free cash flow to equity as well. Well, then you will probably have to look at price to sales or other aspects which are purely speculative to decide if you want to invest into that company or not. So without wrapping up the price to relative valuation ratios. And in the next lecture we are going to be discussing the PAG and also the enterprise value ratios before wrapping up relative valuation and going into special situations in chapter number 5 with that causing her this lecture. Thanks for your attention. 17. Relative Valuation - PEG or P/E to Growth: Welcome back investors. In chapter number four, we're still in the relative relation methods. We're going to be discussing peg, which is a price to earnings growth, a relative valuation ratio. And before we, we go deep and calculating the pack for the four companies that we have been consistently looking into through the whole course. So Reshma, carrying Apple and Microsoft, let me first introduce the price to earnings growth ratio versus the P and E. So the price to earnings ratio. So what the, what the PAG brings in, what the PE does not have it bring it brings in in fact, expected earnings growth. And if you remember, when I was explaining to you the interpretation of the peony, I was telling you when you buy a company today with a price to earnings of, let's say 100. You're looking at the current earnings depending if you're taking the last quarter, the last full year, or if you're using a three-year or five-year average, what is missing or what? Yeah, let's say what is the actually missing in the price to earnings is you do not capture the potential growth, how the earnings will grow in the future. And this is actually what the peg is trying to correct, is really to looking into adding an expected earnings growth into the price to earnings ratio. So it's similar to the PE, but you're adding this growth assumption into it. And in terms of interpretation, so remember that on a price to earnings ratio, you're looking at below 20, below 15, even if possible below 10, to be an potential on the valuation of a company. And on the pack we're going to be the closer the peg is to one, the closer we will be to a potential undervaluation and actually vary. Famous investors like Peter Lynch, they were looking at the PAC indeed to determine if a company was undervalued or overvalued by the market. So as sets, the difference between the PE and PEG is really this growth assumptions that we are bringing in. And some people will say, Yeah, but I don't like to bring in growth assumptions. And on the other hand, if you remember, we were looking in chapter number three at a going concern valuations, we will also bringing in growth assumption. So when we're speaking about the free cash flow to the firm so that the discounted cashflow, discounted future earnings even on the dividends. The Gordon Growth Model relative to dividends and dividend growth year over year, you are bringing in growth assumptions as well. So the peg is also a very valid indicator to look at overvaluation, obviously depending on the growth assumptions that you're bringing in. So the formula you see it in the red frame below, the PAG is calculated by the price to earnings divided by the EPS growth rate that you need to bring in as a value and not in terms of percentage. So if I take the example of Reshma and enriched law, if you remember, we were having a PE at a price of 655 of 390 given the latest earnings per shares. And if you would take rational and a 5% growth rate. You would be able to calculate to take the 3190, you divide it by five, and you end up in a panic value of 6038, which shows overvaluation. What I'm trying to show you here before I bring this to all four companies, is if I change the growth rate assumptions from 5% to 9%, you see in fact that the PAG is going down to 356. So the whole conversation, and this is one example of Rushmore is really what is the right growth assumption that you need to bring in that will give you a serious estimate of the PAG and then determine if there is an over on the valuation. It's clear if you would bring in four in this example of Rushmore, you would bring in a growth rate of 30 and you would divide the peony of 390 by 30. You would be at the peg around one, which would show on the valuation. But then as an investor you need to think, is the assumption and bringing of 30 percent growth rate. Is that a good or a fair assumption or am I just being crazy of bringing such a high growth rate into it? So if we bring this to our four companies, so you're a little bit into Reshma, we're going to look into carrying as well, and Apple and Microsoft. So we are looking at the net income. So in order to determine the PAG, we need to look. And I was already using this in previous lecture, the growth assumptions. And I'm looking at the revenues are how the revenues grow year over year. And you see that here in the red frames, I'm using an 1896 growth assumption for Reshma, which is an average. I'm using as well a 003 for carrying a 6444 apple and a 859, historical revenue growth for Microsoft. And if we take those variables, we'll bring them in. You see how the pack, what the result of the calculation. You see that Reshma would be a 356 carrying is pretty high at 16 or 31, apple at 545, and mike's off at 445. And again, the point is here, you need to double-check how your assumptions are and if they feel realistic or not. But I was just using the same expected growth that I was using in the free cash flow to the firm expectations and calculations in Chapter number three. And you know that I want you to be an independent investor and that I want you also to be able to compound and calculate by yourself all those ratios. And there are nonetheless some kind of sites like the right aside the fin with side, you have the Morningstar side and i've, I've done an extract from the Morningstar side where you see that on the valuation sheet for all of our four companies, you see that we have already price to sales, price to earnings, price to cash flow, price to book, price to forward earnings. The PEG ratio we have as well, the enterprise value to EBIT and the enterprise value to EBITDA that we will cover in the next lecture, which are already precalculated. So what I'm doing here, I'm taking the 2020 PEG ratio. So that would be 125 for Reshma, 259 for carrying, for Apple it's 333. And from Microsoft it would be a 257. And when I bring in those figures, you can see in fact how I am, let's say deriving the expected growth assumptions. Because when you look at the Morningstar.com site, I'm not telling you the growth assumption they're putting in there, just telling you the figure. So what you need to do is reverse this and just kind of estimate, okay, what are the growth expectation that are putting behind? And you see this in the red frame. So either pegs that have been announced and by the way, for APA was I was using the five-year average and not the current one at 187. Just for the sake of the exercise, I think it's a mistake. I should have put 287 instead of 187, but you can, you can do yourself the calculation. So if you look at a really small with a 215 peg, it means that morning size estimating a 14, 84 percent growth for carrying and a pack of 295 would be 1121. Apple adjunct to 87. Obviously that would be smaller than 1877. And Microsoft with a pack at 257, it would be a 14, 88% growth. So, so assets with a PAGA, It's an interesting measure. It's an interesting metric. Peter Lynch's using it or has been using it a lot when he was an active investor. The main points based on the price to earnings. So what is positive with a peg versus price to earnings is bringing in a growth assumption. But at the other hand, what you need to look into is, is that growth assumption realistic as you move forward to determine the pack. But it's a pretty straightforward relative valuation ratio which you can definitely use and which will give you, and a lot of people, a lot of investors, and I'm doing this as well. They look at the PE ratio, but at the same time they look at the PEG ratio. And this is really what I would recommend you to do with that already wrapping up this lecture and in the last lecture of Chapter number 4, we're going to be discussing enterprise value relative valuation ratios. So that wrapping up here, thanks. 18. Relative Valuation - Entreprise Value (EV): All right, investors, last lecture of Chapter number 4. We're gonna be discussing enterprise value relative valuation ratios. And let me first introduce what enterprise value is. So what people were looking into is other relative valuation ratios. And for that they were looking into the total, let's say value of the company. But instead of looking at book value, which we have understood if you went through Chapter number 2, that when you look at book value, if you do not do an adjusted book value, Let's say assessment, you're going to have land that will be carried at cost and also brands for at least for the blue chips, where the brands will probably will be carried also in an undervalued way versus the real value of the brand. So the intangible assets will also be most probably smaller than what you could really befores to pay if you would be acquiring a company that has a huge brands. But also, remember the same. I went you through an example with a land that was carried at cost as well in IFRS and US GAAP companies. So the idea of the enterprise value is not just to look at the market capitalization, but two, and depth to it and to remove cash and cash equivalents. So what the investors who use EV they look into is not only what the market is giving as a purchase price, but what would be the theoretical take over price? So the market cap will not be enough, but you will need to add. So remember that the market cap, according to the investors and to the market reflects the equity. And here they are seeing in case of theoretical takeover of a buyer of the company, you need to add depth to it. So long-term debt because that's something that you'll have to serve as well for the credit told us. And at the same time, cash and cash equivalent is something that can be subtracted. Because in fact, when you buy the company, I mean, you will not have to buy for that cash according to the EV. That's a formulation. And from an interpretation perspective. So enterprise value estimates, as do other relative valuation ratios, the number of years in which you will have the payback of the acquisition costs that you were, let's say paying the seller of the company. And this is through the earnings. So it's pretty similar to PE ratio. Remember when we were discussing the PE ratio was mentioning that the interpretation of the P0 is you're buying a certain amount of years at the earnings that you're looking into. If it is the trailing 12 months earnings last fiscal year, full year earnings, or if you're looking maybe either three or five-year earnings average. Remember that the PAG was bringing in some growth assumptions versus the P0. And here in the interpretation of the EV, actually the EV alone is only telling you the theoretical takeover price that the market is giving you. But investors, they do look at EV to EBITDA and EV to EBITDA earnings before interest and taxes, or EBIT EBITDA. That would be the enterprise value divided by the earnings before interest, taxes, depreciation, and amortization. So EV to EBITDA below 10 is considered cheap, similar to the PE. You will be buying less than 10 years of earnings. So you see it's actually not too far away from the PE ratio. The important thing always to remember, and it's the same for the price to earnings and price earnings to growth. And it's the same for the enterprise value, is that ratio will fluctuate with the market if you're having a bad market. All those relative valuation ratios, if it is the P0, the peg and the EV, they will go down. So it will have opportunities to buy companies at cheap prices. So as I said, the two most use ratios and are going to be walking you through the EV to EBIT and EBITDA. And in fact, we have already been looking into mono discussing the multiple earnings method. It's the company or the buyer is looking at the ability of the company to generate operating cashflows while you have as well the enterprise value to sales, sometimes also called the enterprise value to revenue, which is a multiple revenue method. And you remember it was in the beginning of one of the earlier chapters I was mentioning that I do not like to lose at multiple revenue, but I do like to, I prefer to use multiple earnings method. Asset revenue doesn't mean anything. It's the margin on the revenue that is important or the profit on the revenue that is important. And in fact, when no, it'll be discussing enterprise value to sales. That's similar to price to sales ratio. In fact, like the EV to EBITDA would be like price to earnings. So if we look at our four companies, so Reshma, carrying Apple and Microsoft, and I've been calculating the enterprise value. So remember that the enterprise value is the current market cap. So the market cap is you take the price that the market is giving you today and you're multiplying it by the diluted washes of the diluted weighted average shares outstanding. And this gives you the current market cap. So you can, if you remember, the rational market cap at that time was 37 billion, seventy one 0.6s for carrying 2 trillion for apple and one dot 7 trillion for Microsoft. The enterprise value we need to add depth. And I'm using here only long-term depth because I consider that current depth is kind of covered through the working capital. Current assets. I'm just looking at long-term liabilities. I'm adding long-term debt. You see that for Reshma would be 7.3 billion for carrying 825 Apple One, 153, a billion of long-term debt. And for monks or 110 billion of long-term debt, then we need to look at cash and cash equivalents. So I'm removing 0.6s for Richmond to the 34 carrying 194 billion for Apple and 136 25 billion of cash and cash equivalents from Microsoft, which gives me the enterprise value. So the EV would then be, you see this in the first red frame. It would be 34 dot 7 billion for Reshma, 77 dot nine for carrying, one dot 9 trillion for apple and one dot dot 667 trillion for Microsoft. And now if you remember the previous formula, so. We wouldn't need to calculate this EV to EBITDA multiple to determine if the market is undervalued or overvalued getting the company. And for that you will need obviously to take the enterprise value, but also look at the earnings before interest and taxes. So the net operating income before taxes, and I'm using here at 15 billion for Reshma, three dots four for carrying 66 dot t2 for Apple and 56 No.1 for Microsoft, which gives me an EV to EBITDA variation relative relation of 22000, 95 flourish more 22000 for, for carrying, 2977 for Apple and 2971 for Microsoft. And if I bring this also to enterprise value to sales, we're going to have 2444979, 10, and 11, not 66 for Microsoft. But do remember I'm not the biggest fan of neither price to sales now enterprise value to sales. Because as I, again, I'm repeating myself. Revenue and turnover doesn't mean anything. It's the profit or the costs that are associated to that turnover that will determine the profit. And this is where you, you, the company and you as an investor have to look into how profitable is the company and generating profits from, let's say, $1 of revenue to this, why I prefer to use multiple earnings, but also enterprise value to EBIT as one of the relative valuation measures. And here what we can now discuss, how do those companies look like in terms of EV to EBIT. And you see that Reshma, at a price of six hundred four hundred fifty five, was at 22000, 95. So still a little bit high when it was that between 55 and 57. So obviously, I was closer to a 16 EV to EBITDA evaluation, sorry. And carrying, what is interesting is carrying appears here to other evaluation metrics that we were using. Cheaper than, than in previous valuations. And tests that we were doing. Apple and Microsoft still are at 30, little bit overvalued at those market prices. So I said at the very end of the day what you need to decide. And as I'm wrapping up here, chapter number 4, and I'm showing you again the morning star evaluation sheet for those four companies. You first of all, you see that on the morning star side, you have mostly relative valuation ratio. So you see Price to say its price to earnings, price to cash flow, price to book, price to Ford earnings. The PEG ratio that we have been discussing, and then the EV to EBITDA to the enterprise value to EBIT and the EV to EBITDA. So with that, you will need to ask yourself, am I okay using precalculated relative valuations like for example, the Morningstar site. It's always good to double-check your own calculations with monic. So this is how I am investing. I do my own calculations and then I compare them with Morningstar if I end up in similar valuations or not. And at the very end of the day, as I said earlier, I do absolute valuation every time this is for me very important. I do the price to book, but I do estimate the book value and I do the adjusted book value, looking at Lands, looking at the brands passivity, that's a very quick one to adjust. And I do look as well at future a future cash-flows. So the free cash flow to the firm and free cash flow to equity. So dividend part as well of the story. Because remember when I do invest is I tried to buy companies at 25 to 30 percent undervalued by the market that are not value traps. And while my money sit still while I be expecting the capital gain, so that the purchase price, the market price of the company I'm investing into will grow and go beyond these 25 to 30 percent on the valuation I had. I want to have in the meantime, passive revenue streams, so being in dividends or being its share buybacks as well. So that wrapping up chapter number four and in chapter number 5, before concluding this training. In chapter number 5, we're going to be discussing special evaluation situations like merging acquisitions, the thing that you need to know, private equity and venture capital IPOs and DPOs, but also the bank valuation because that's a very specific one. Because the way how you evaluate banks is, has to be done differently versus a standard company. So I told you in the next chapter, Thank you. 19. Special Valuation situations - Merger & acquisitions: All right, investors starting chapter number 5. And if you remember, we have been and I've been walking you in chapters 2, 3, and 4. So Chapters 2 and 3 were on absolute valuation methods where we were looking at acid-base valuation in Chapter number 2, going concerns are looking at the future streams of revenue and of cash of the company is in chapter number 3 specifically. And in chapter number four, I was introducing you to everything that is relative valuation in which is something that a lot of investors actually use. And as I said earlier, 20 years ago, I started with relative valuation, but now I systematically do. Absolute valuation is asset-based valuation would also going concern evaluation. So chapter number 5, and I felt that the course would not be complete if I would not give further, let's say perspective on special valuation situations. And the first special evaluation situation I would like to discuss with you is the merger and acquisitions or M&As. And this happens all the time. So you're going to see a lot of companies that tried to acquire other companies. You saw this with Facebook, buying Instagram. I mean, the big tech companies are buying a lot of smaller startups. But this is also happening in more mature industries like food industry is steel industry, those kind of things. So before we discuss the devaluation story related to emerge and acquisitions, I just want you to understand the difference between the primary market and secondary market. Because when we speak about merging acquisitions, it may happen, in fact on both markets, depending if you're looking at private equity of public equity. So I think it's important that you just get that right. So when you look at primary markets here, typically is, is where the securities and the shares are created. And typically the primary market we are looking at venture capital. So startups, if you're a startup and the company has been incorporated in the Silicon Valley in California, or that will be a VC space. So that's primary market. The company is not available for purchasing or for, let's say, for the public, it's impossible to buy the shares of the company. So that will be the VC space private equity as well. I mean the term private equity means it's equity. Those are shares that are, let's say, sold and bought in a private space, and that is not public equity. And then you have indeed the secondary market where mean this is the most known, also the most liquid one, where you're going to have the New York Stock Exchange, long Stock Exchange, Frankfurt, Paris, all the big Hong Kong, all the big stock exchanges you have in the world where in fact securities are traded amongst investors. So just have that right. When you look at mergers and acquisitions, you may be in the primary market, but you may also be in the secondary market. And when you look at typical emergent acquisition lingo, and I think it's also good for you to know that there are different types of mergers and acquisitions. You have what we call the horizontal, vertical and conglomerate. Horizontal would be a combination of two companies into single business entity. A vertical merger is, for example, when a company buys its supplier or distributor to have control of that and not having this as a cost to them. This has happened, for example, in steel industry where a couple of years ago you were seeing steel industry, let's say manufacturers, producers buying. Mining companies so that they would have the raw materials as part of that group and not just having this as an external supplier. So you have conglomerates. So that would be a purchase of another company in different industry or business sector when you, when you speak. But conglomerates, They still exist today, but you will very typically look at, for example, General Electric and the US was very well known as being a huge conglomerate. You have Mitsubishi in Japan, which is also a huge conglomerates. And then in the types of mergers and acquisitions, you have the friendly takeover. So they're indeed there is an approval of the board of directors of the company that has, that is being acquired, then you have the hostile takeover. You have sometimes also activist shareholders who try to push because they believe that the company is not very well-managed, that they want to acquire or that they are already shareholder. So you have those hostile takeovers tentative as well, where indeed the board of directors is per default not willing to sell the company to take over, let's say a buyer. You could ask yourself, why are hostile takeovers taking place? It's because of the free float and let me just leverage 1 second on that. When, when your company on your public equity company and 80, so 80 percent of your shares on the market free-floating. And you have an competitor that wants to do a hostile takeover and the competitor is willing to pay a high premium price for that. Well, the board of directors and the company is only in control of the 20 percent remaining equity. So the other 80 percent, you may have people who say, I just want to have to cash in on the premium that the hostile takeover buyer wants to put on the table. And this is why hostile takeovers take place. So I'm always saying to avoid hostile takeovers, your free float on the public equity market has to be very low. If you have only 20 percent of the shares that are free float and 80 percent, let's say, owned by the company. It's very difficult to do a hostile takeover because you will, I mean, in the worst-case scenario, that company will aggregate 20 percent of the free float, but they will never own 80 percent, most probably. And then you have a reverse takeover. So this is when, for example, a private company acquires a public company. It happens from time to time. For example, Warren Buffett with Berkshire has doing this that sometimes public companies, they wanted to go away from the pressure of the market, of having to report quarterly figures, of having to say explained to analyst and spend time explaining to Analyst why the earnings per share were like this, this quarter and we're the future outlooks. They just said, We want to focus on our core business, our customers, and not managing public expectation. And this is what can happen in a reverse takeover VM via advantage when we look at mergers and acquisitions, when they are done in private equity. And that's information that you will probably not have access to as a public equity investor is, and I've put here like the checklist of things that you need to think when you do a merger and acquisition. Obviously, you will need to look at the financial statements. Obviously, you need to look at the interim and the current year to date financial statements. You need to look as well at budget forecasts and business plans. That's something that, for example, a public equity company, you will not have access to the copies of existing contracts understanding if there are some contingencies and liabilities that are potentially not reflected on the balance sheet. Everything that is additional business information about suppliers of the company. Looking at. 20. Special Valuation situations - Private Equity & Venture Capital: Welcome back investors. In chapter number 5, you remember we are looking at special valuation situations. As I told you, I felt it would have not been enough to wrap up the course without discussing the differences or how to value a special situations like emergent acquisition, like private equity venture capital, like an IPO, or direct public offering, and also the bank. So now in this second lecture of Chapter number 5, you're going to be discussing private equity and venture capital and already giving some insights on how those companies ought to be valued and which methods are being used also by professionals, one, looking at private equity and venture capital investments versus public equity investments. So remember, and I was showing you this graph also in, and I'm showing his wife and other courses. That's when you speak about the area of private equity venture capital, what we call the primary market versus the secondary market, which is public equity. Definitely the expectations and the returns are much higher, or I expect to be much higher than in the public market or in the secondary market. The reason for that is that the risks are higher. So always keep that in mind that the higher the risk, the higher the expected returns shall be and should be, will be. But obviously, I mean, as you take more risk, also, you're going to have some deception that are related to the investment that you're going to make. So before looking at how to value VC and private equity, I think it's important that you have a, an understanding of what are the rounds of investments that typically those companies have to face. So typically, companies start with seed investing. So that's typically the source of financing or during the seed rounds will be typically a triple F, what we call friends, families, and fools can also be business angels can also be crowdfunding. You're going to have also some venture capital funds as well, but less. Initial seed funding will come actually from friends, family, fools, and some business angels and sometimes also crowdfunding. When the company stones to let say acquire its first customers, you're going to see the second or the first, second, third round of investing is sometimes called the ABC series of investments. And then they end up very often with the mezzanine investment, which is like the last round of investment before potentially a The being acquired or potentially going for the public market. So for becoming a public equity company versus a private equity company. So that typically as revenues growth, as the revenues grow, you're going to have typically venture capital funds in the early stages of the ABC or first, second, third round series. While in later stages, when the company is really expanding, you're going to have more, let's say private equity that will be investing in not only VC funds that will be investing into those companies. And then again, I said sometimes the company is being acquired before it goes public, or then the company becomes public through an IPO or a CPU that we're going to be discussing in the next chapter. What I like to share with you as I mean, the intention is to discuss valuation methods and there is a very interesting report from the Pepperdine Business School. That is published, if I'm not mistaken, every year, where they count of survey different profiles of investments. If it is investment banker as private equity business appraisers or angels, business angels. And what is interesting and tried to put in this table and you have the reference below is what those kind of investors are using as valuation methods. And what you need to keep in mind behind the four categories. It is an investment banker, private equity business appraise or angel, that typically a business angel is very probably not investing into public equity. Private equity investors, they're going to be probably invested into companies that are already beyond the angel investing, let's say rounds and also below the seed funding round. So those will be companies that are probably already more mature, where also the investment size will be bigger. Well, there's interesting nonetheless. And yeah, I forgot to say about investment bank bankers. Very often investment bankers are the ones who invest into very late-stage private equity, or even sometimes they invest into the evaluation and the underwriting for a company that is going from private equity to public equity. So from the primary market to the secondary market, via when you look at the various methods, how Pepperdine classifies them. So you have so capitalization of earnings method, you have this constitute your earnings. You have the adjusted acid methods, and then you have like what they call the guideline when it is public or private transactions method is typically those are multiple, then you have got speeding. That's like pure, I would say kind of guessing and then other ones that could be related. And I'm going to be discussing this on a specific book I have about angel investing, which is, I must say that kind of gathers what other elements are, Let's say, attributes of taking precision for investing into such companies. So when you look at the investment bankers, so you see here in the 2018 report, there have been 88 investment bankers and have been surveyed. And you see in red that the most commonly used valuation methods have been capitalization of earnings and discounted future earnings method. That's basically so futures are discounted future earnings method. Difference between future earnings and capitalization of earnings is the capitalization of earnings you just divide by the capital rate or the discounted future earnings method you have. If you look back in the previous chapters, you remember that it's a little bit more complex calculation. While the capitalization of earnings is just you take the earnings and you divide by the capital rate. So it's a much more simpler one. And they do use as well similar transaction methods. So that would be probably a multiple earnings method that an investment banker could observe for other similar companies that they want to invest into. So you see that would be 25 percent of the cases where the investment banker would use the multiple earnings method when you look at private equity. So remember that typically private equity will probably be investing in the last rounds before a company goes IPO is being acquired. So you see that in 2009 and 24 percent of the cases. So that's one out of two. Of the 43 respondents, they're going to be using capitalization of earnings and discounted future earnings method. That means probably that those companies are mature and they do print indeed money because they do earn earnings on the revenues that they are generating. When you look at business appraisers, that would be more like a consulting companies. They also as well use for nearly 60, that's 63%. So 27 plus 36 percent, they're going to be using capitalization of earnings and discounted future earnings method. And when you look at business angels from the 47 business angels and have been surveyed by the Pepperdine report in 2018. You actually see, and remember I was saying this business angels do not invest into growth or mature companies. They invest into very early stage companies are early stage companies. And there you see that the two methods that are mostly used, our guts feeling and other attributes. And the attributes can be a lot of things, can be the personality of the founders, for example. And I'm showing this in my bio, I have in mentoring startups since 2010. And indeed what makes it different is really the founders and the purpose, why they have been creating that company. And you're going to have founders. They really want to change the world with their invention and other founders, the only idea that they have is that in five-years I want to sell the company to somebody else. And so that's kinda of attributes that business angels they do indeed look into. Because there are no earnings, there is no cash generated, there is just cash being burned in early stage and high growth companies, because those companies have a lot of capital needs to fuel the future growth before turning. Let's say the market that they have gained into profitability, into profits. So remember my curve, that was the risk versus return. You remember the higher the risk. So private equity was coming before VC investment, then the return expectations are higher. And you see here and the two red frames, and this is again coming out of the Pepperdine report, where you see that, for example, in the venture capitalist frame, you see that even VC invest into seeds, the median expected return that he will be, he or she will be using is 45 percent if it is a startup. So that's already after the seed phase would be 38. It was an early stage company that would be 33. When it is expanding, it's 33 and what is already a later stage VC investment, you're going to be at 28. So you see mean when those companies have gone through the first acquisition of customers of markets and the company is growing. So what we call middle stage, later stage, you're going to see that the rate of returns are going down because a probability is just lower that the company will either go bankrupt or disappear. When you look on the right-hand side on angel investments, the same when an angel investing into CDE, just look at the median value. It's it's between 25 and 98, but the median value would be 55 percent rate of return when it is a startup. So after the seat phase 50. This age 40 and medium stage, the expansion stage 35, and it's a stage 35. So you see also typically that angel investors, they do invest into more risky companies than VCs typically. And that's logical. Then you have the same when you go to the left outside of those red frames, you see that when it is a mezzanine investment and median rate of return is 12 dot phi for example. Or when is a bank loan? It will be like 35 percent. So it really depends on the stage that the company is in. How an appraiser on investor, if you are the investor, what are the expected rates of return that you should put into it? And the reason for that is that there is a higher probability that, I mean, when you, if you would invest into 100 companies in seed stage, I can guarantee you that after five years, there's going to be maximum five out of those 100 seed companies that will still exist. And startups probably it will be maybe ten out of 100. So if you are putting money into 100 companies, you're going to be losing on 95 seed companies, on 90 startup companies are going to be disappearing. So you haven't been putting cash into those companies and those companies have disappeared. So the companies that are remaining half to compensate for the loss of investment that you, where you were hit on the companies that disappeared. If it's seed stage, startup stage, et cetera. And couple of other thoughts, I found the clear light. So that's an aside that they also give some advice on how to invest into companies if you're a private equity or VC investor. And just look at the two red frames when they look at the valuation methodologies for, I mean, for private equity, they clearly say a private equity investment is later stage. It's an established company. The company has more than five years of operating history and the EBITDA is positive. Very probably a VC is looking at startup or early stage companies. The companies, the company that VCs are investing into have less than five years of history and they are looking into pre EBITDA. So it means that probably the EBITDA is negative. So the valuation methodologies according to clear light, the light to use a multiple of EBITDA. So that would be what It's the enterprise value divided by EBITDA multiple earnings method that we have been seeing in relative valuation. They could also use discounted future earnings as method. They are not mentioning it here, but I would typically look, look if the EBITDA is positive, I would look at a discounted future earnings and so everything that is free cash flow to the firm as well. On the VC side, remember we were discussing this earlier when we were discussing the price to sales. And also the EV 2 says the enterprise value to say, as I was mentioning that typically, I mean, as we are pre positive EBITDA, there's companies are destroying for the time being, money. They are destroying investments. There. How to evaluate those companies were clear, light. They say we use a multiple of the revenue and other multiple of Dreams, which means what? It's purely speculative, its guts feeling. And on the return expectations. Remember what the Pepperdine report was sharing, remember the graph and I'm using where private equity and venture capital are very high on the risk scale. And that the expected returns have to be. Indeed above 15, 20, 30 percent. So for PIE Investments, clear lie. They clearly say that they are expecting a two to three times Invested Capital written per deal while venture capital extracting more than three times. Why? Because they're going to be losing money on many deals. And they say, and this is very interesting. It's a little bit what I was saying that if you're investing into 100 seed companies after five years, maybe five have survived. So if you have put money into the other 95, that money has gone, you will not see that money coming back to you. So the five remaining will have to compensate for the loss of the 95. Actually, they are kind of saying the same here is that 80 percent of the returns have to come from 20 percent of the deal. So this kind of Pareto rule, if you're really interested into venture capital investments, there is one book, I have it behind you also in my library. And it's very interesting one I've been reading a couple of books, but this book is giving some kind of attributes on how to invest into startups for venture capitalists. And it's very eye-opening about the reality of the guy is called Jason calcaneus. And the book is called angel on how to invest into tech startups and what the expectations are. And he has some, let's say, hot attributes, but also some softer attributes that really go about the persona's, about the founders, the purpose, why the founders have been creating those companies. And it's pretty interesting to see the, the amount of money that is being destroyed for the ones that are remaining. And how he saw adjacent is making money out of being a VC investor for many, many years. So it's pretty interesting. So if you're into Vc, which is absolutely not my, my investment universe. But if you're into Vc, I really recommend you this book. And looking at the attributes on how the guy explains how to invest and how to select companies. So just for the sake of being complete, I'm not, I mean, while I'm saying that VC investment is not my style of investing and it's not my investment universe. I do like to invest into blue chips and one of the companies I'm sitting at the board of directors, we invest into private equity as well. But I'm not saying that investing into Vc, that systematically you're going to be losing money. I mean, just look here at the top 25 VC-backed exits of all time. I mean, you see her some companies like Google, like Twitter, like Facebook. You have snap, you have Dropbox, you have Spotify. I mean, the Alibaba Group as well. There have been some very, very, very successful companies that have been funded by, by the VC space. So not everything is negative, but just be mindful that when you invest in to the VC space versus the private equity space versus the public equity space. The expectations and the attributes that you're going to be using will just be totally different asset, remember in the VC space in a startup, the earnings are negative so you cannot do a free cash flow to the firm. They're not even paying out dividends when you're looking at private equity, very probably those companies have positive earnings. They are posting profits there you can already start using absolute valuation methods and also multiple earnings methods and looking at similar transaction on the market. When you are in the public equity area, the market is giving you a price, are ready. And you can then use the full fledged methods that we have been looking into Chapter twos, threes for absolute valuation, so acid-base and going concern, but then also relative valuation ones in the public markets. And last but not least, also showing you that was in 2017, if I'm not mistaken the unicorns by valuations at that time. And you see very famous companies that have gone public admitting like Xiaomi, YouTuber, Snapchat, you have space acts, Pinterest, B&B. You have to run those as well. Have been scandals related to it. You have WeWork, for example as well that had some issuance and the founder has to leave. We have companies like Square that are today pretty successful, at least very well-known DocuSign slack for example. So people, I mean there are unicorns out there. And the question is always, how you're going to bet on the right unicorn when that unicorn is, either you are a VC or private equity investor, or the company goes IPO that we're going to be discussing in the next lecture. What are the right bats? And this is a little bit while I'm trying just to make you think when you are in the VCE, whether you are in the VC space or in the PE. So private equity space or in the public equity space, that the ways of evaluating companies are not the same. You cannot apply public equity valuation method to the VC space that will just not work. So then wrapping up the lecture on private equity and venture capital and the next one, as logical step we are going to be looking into IPO is DPOs. And I'm going to be looking at three companies go pro at sea and Fitbit. What happened after they went public with that? Took you in the next lecture. Thank you. 21. Special Valuation situations - IPO & DPOs : All right, investors, after having discussed in the previous lecture, private equity venture capital, remember, I was telling you how to use valuation methods depending whether you're in the VC PE or public equity. Again, just refreshing your mind in the VC space very probably you're going to be using multiple revenues or other metrics. While in the private equity those companies are ready, we'll be starting to publish or to print some money, some having some profitability, having some earnings as well. So that you are going to be already starting to use much more. Our EBIT is relative valuation. Well, in the relative relation for private equity, you will not be able to have that because outside of similar transactions, there is no market that is giving you the price. So probably going to be looking more at going concern valuation. So like free cash flow to the firm. So discounted cashflow, discounted future earnings, and maybe some acid-base or adjusted asset-based valuation. While when you look at public equity asset, you can look you can look at many methods and most probably, I mean, I strongly recommend you that you look at everything that is asset-based valuation going concern and relative and not necessarily looking at multiple earnings. So when we're speaking about venture capital and private equity, I was saying that from the primary market it happens very often at those companies. They, they tried to go public or they tried to be acquired before. They, they have burned all their cash. And the intention of going public is really to raise capital from the public and not from private investors. This is really when those companies think about going into the secondary market. And there are two, let's say, categories are two ways of going public. The one that is most known is what is called an IPO. So in the IPO, the difference between IQ and direct public offering. So IP versus DPO is that the IPO, the company is being transformed from private to public company. But there isn't very often an investment banker in-between or sometimes multiple investment bankers, are you, there have been some transaction would have been for investment bankers or buy up all the shares of the company. And then those investment bankers, they take care of selling the shares that are to be, let's say, create it on the market or the sale of the existing shares. Those shares will in fact be sold to institutional investors and even to the public. So obviously, the intermediary or the investment banker that is taken care of the underwriting. They're going to earn some fees on that, obviously. And they initially, they also define the initial price of the IPO. Then obviously as it is going public, there are some regulatory aspects ready to it. There has to be an IPO perspectives. India's it has to be an SEC approval. We have the same in China for example, there was the, remember the name, but there was like a financial spinoff from Jack Ma from Alibaba that at the very end, he did not get the approval from the financial authorities in China to do the IPO process. So they had to retrieve the intention of going IPO. And from the moment the company goes IPO goes public, then the shares are traded on. One or many stock exchanges can be the nasdaq, can be the New York Stock Exchange can be one of the European stock exchanges. Chinese, Hong Kong. Whatever we have seen lately is that there are some companies who do not like to go through this on the writing process and they go directly to the markets. And the US Securities and Exchange Commission has been announcing that they are supporting also this DPO, which is obviously good news. There are some pros and cons to it. In an IPO, the company has guaranteed that the shares that it had been newly created or that the current owners are selling, they're selling a part of those shares of their shares. That the shares will be, let's say, sold because there is an underwriter. There. I mean, there's no risk that the shares will not be. So it's, the risk is always how the market will see with the price go up, with the price go down. In DPO as there is no underwriter, there is no guarantee that the shares that the current existing owners or employees are selling to the market, that they're going to find a new owner, that they're gonna find a buyer that's always a risk. And for example, I'm giving the example of Spotify. Spotify they did a DP or they didn't do an IPO. And it's true that all the shares were sold. So they took the decision of trying to do a direct listing because they were probably confident enough That's doing a DPO that they would find buyers for their shares. So the whole conversation about when we bring these back to valuation is if you would invest I mean, if you're not a VC investor, if you're not a private equity investor, but your public equity investor, you may have in your investment universe the intention of investing into IPOs. And you can ask your bank because IPOs are nouns in advance that you would like to invest into GoPro, for example, of Fitbits or Facebook when they, before they went public. And and the question is always, would you have earned money on those IPOs? Yes or no? Remember here we are speaking about managing the blue chip area of public equity companies. When they become public, we are speaking about, let's say, mature companies that are going from the primary market to the secondary market. And it's very interesting, and this one I'm showing here, I'm giving you the URLs as well for information that's going to be exploring this on a Fitbit, GoPro and Etsy, but they have been very successful IPOs. Look at Square, for example, since 20152019, the valuation of the company has been multiplied by 7. Facebook as well. The valuation of the company has been multiplied by three. Alibaba, multiple. So if you have invested $1, you would have received $2.68, for example. So would you have invested into field bandgap or this is what we are going to be discussing. You will have destroyed value. So do we have a way of finding out if investing into IPOs is good or bad. So what I'm really telling you with this slide, with a boom or bust slide is you. I mean, it's not because it's an IPO that you're going to be earning money on it. They are IPOs. And this one, I'm trying to show you that our very positive and other IPOs that are negative. Let's take three examples. I mean, three companies I'm taking here. Most of the people know them. It's GoPro, it's Fitbit, and it's assay. So GoPro, those are those cameras. I have one as well. I think I have a GoPro for GoPro, GoPro five. So good for, announced in 2014 that they would do an IPO and the initial price that they were offering to the market was 24 US dollar. And you see it here on the graph 1, the markets. I mean, after the IPO, you see that within a couple of months until 2015, the valuation of the company went up to 90. So if you would have bought 24, you would have multiplied by 3.5 times four times your money. And what happened afterwards? So the shares came down to 40, then they went up again to 65, and since then they have not recovered. So if you would have had invested 24 US dollars in the very beginning for an IPO. I mean, here you see that timing would have been important. You could have multiplied the amount of money by 3.54 times, which is a great return just after a couple of months. If you would have when if you would have gone along with that company today the company or when I prepared a screenshot for the training here, the company is with 881 per dollar and so that's minus 63 percent from the IPO price. So that's a tough one. So you have destroyed a lot of 3.5, destroyed three quarters of your money by doing these are two thirds. When you look at Fitbit. I mean, a lot of people, I mean, I have bought even Fitbits to my wife twice. And in the meantime, they have been bought by by Google and there is an intention has been finalized. But Fitbits, they announce Also in 2015 that they would like to go public. And they set our initial price offering will be at $20 per share. Same scenario a couple of months later. I think that was 2016, the value of 16 and up to close to 52. And then since it went down and down, and it has recovered a little bit since, let's say 2020 over z, there was a crisis of COVID crisis. And we see now that the current share price is around six US dollar per share. Would you have invested 20 years dollars in the beginning, you could have multiplied by 2 your earnings just after a couple of months. And then it looks like everybody started to sell off, let's say the Fitbit chairs and now they have not recovered. So it went down if you would have been an early investor from when the company went IPO from 20, you would have destroyed by three times your value. So that's minus 65 percent from the IPO moment. But there are other ones are the IPs that are very successful. Look at Etsy. Etsy has been initially in 2015 announcing a $16 if I'm not mistaken, yeah, $16 per share, initial evaluation when going public. And now it's worth two hundred thirteen hundred fifty nine US dollars per share. That's a plus one. That's a 38% compound annual growth rate, which is just incredible. I mean, well, want to be honest with you is between when I look at the brands GoPro, Fitbit and ETC. Honestly, I would not have been able to tell you which 100 had been successful versus the other one? I would not have been able to tell you that that the final result of GoPro and Fitbit would have been so negative versus Etsy. For me when I've been very difficult to estimate that I didn't have a crystal ball. So this is why my southern investment is blue chips because I believe that I would probably have screwed it up by investing into those three companies. And when you look at Morningstar extracts, so Fitbit has disappeared because you haven't acquired by Google. So I'm no longer able to find the Fitbit valuations. But if you look at the Morning Star valuations, you see that you see the price to sales, the price to earnings. When the price to earnings on not put or it just says dash, that means that the price earnings was negative. The price to cash flow, the same negative price to book. You have the valuations here, the PEG ratios. You have the earnings yield that are negative. So this is showing you that the company is losing money from 2015 on. And you see as well EV to EBITDA and EV to EBITDA add a dash means that there are no positive earnings. When you look at Etsy, Etsy. And this is very surprising before they went public, they were having negative earnings, so the price to earnings was negative. And since then there have been publishing positive earnings or printing money. So, and I've tried to bring the story together in this graph is the graph that I've created for the training here I've put the three companies go pro in blue, a Fitbit in orange, and add see in gray. So on the left-hand side you have the year over year growth. Remember that companies, when they are startups, they grow like hell year over year and then at a certain time they start maturing and the year-over-year growth starts declining. This is what you see. Before the IPO, you had like crazy to a 100 percent, more than 100% growth assumptions on this companies with the exception of assay that was at 70 percent, 60 percent, and 40 percent before they went IPO. And and on the right-hand side you see the earnings per share that I Extract it. So you see that GoPro and the blue dots in both diagrams shows when the timing of the GoPro IPO. The orange dots shows you the Fitbit IPO moments that was 2016, and the gray dot shows you the ETC IPO moment. So you see that at sea and GoPro, when public doesn't 15 Fitbit 2016. And when you look at what is pretty interesting from a trajectory is that when GoPro went public, they were still posting positive earnings per share, then they went public, and then suddenly they started to lose money. When you look at Fitbits, with the exception of 2012 and 2013, but 14 and 15, they were having positive earnings per share. And then after the IPO, they went negative. And when you look at Etsy, remember, it was the only one today after many years after the IPO that is being positive on the three example I was giving you, they were actually posting negative earnings per share before the IPO. The year after the IPO, they were still negative. And then since they became positive, would you have been able to, let's say, find this out if you would only have looked at pre-IPO figures. I mean, when you look at GoPro with positive EPS and you wouldn't have expected those EPS is to go on in the future after the IPO. So I do not know, and I'm just making an assumption here. It may happen that some companies do IPOs just before, let's say the, the, the, the castle of costs just breaks down. I do not know. I'm not saying that this is the case for GoPro of a Fitbit. Fitbit has been challenged a lot by the Apple Watch, by Garmin, by competition as well. Which explains maybe why since they have not recovered. But there is something behind those companies. And again, I mean, the brands are strong brands. Lot of people know those brands. Again, this is the exact example why I am not investing into IPOs. Because I would have been totally unable to guess what would have happened after the IPO and would have invested into GoPro Fitbit. I would have destroyed a lot of money. We'll have invested into, ETC. I would have earned a lot of money. So some people would say, Well, just invest into every IPO that comes in. I would say yeah, but then you are diversifying. Then you can as well invest into SAP 500 track of, for example, an ETF, which is like the maximum diversification that you can have. So I'm just saying Here I am just want to open your eyes. I want you to think about IPOs, DPOs when they happen, how valuation is being used. I mean, it depends really on the company. Some companies have positive earnings, other companies have negative earnings. How will you do the valuation of those companies? And it's not easy to find out. I would have expected if I would have to decide, if I would have been an IPO investor, that I would have been looking into EPS. So I've probably, I would have been using free cash flow to the firm on GoPro and on Fitbits, using the latest positive earnings per share, the latest cash flow per share. And with a certain growth assumption, I would have probably ended up at a intrinsic value versus the initial public offering pricing that was proposed to me. That was was it 24 Fitbit and 24 for GoPro? And nonetheless, probably I wouldn't have lost a lot of money on those IPOs. And again, you need to choose your style. I will not tell you how to deal with that. If IPOs are good or bad, they can be good. Look at Facebook, look at Alibaba, look at Etsy. But also they can sometimes turns saw like GoPro and Fitbit. So with that, wrapping up the IPO and DPO lecture and the last lecture and the special valuation situation will be around banks. Thank you. 22. Special Valuation situations - Banks: All right, investors last lecture of Chapter number 5. Remember we're discussing special valuation situations and I said I wanted the course to be complete by commenting or sharing my perspective on mRNAs, private equity, VC, but also IPOs, EPO's and one of the specific categories that I want to discuss with you. Banks, because banks, they do require a specific variation treatments compared to all the rest of the companies. So remember that banks, they make money, they are two ways of making money. The first one is that they charge fees on the maintenance of accounts. They charge fees for overdraft, they charge fees, brokerage fees, deposit fees. When wire transfers are done, they charge fees on the ATM services, those kind of things. That's, that's the way how banks they earn money. Obviously when the interest rates are low, they will not be earning a lot of money. So that's a challenge that they have. So they need to compensate kind of by the fees that they charge. But at the same time, traditional banks, compared to digital banks that we are seeing more and more, traditional banks have very, very asset heavy. They have probably retail branches, those kind of things where there's a cost associated to it. While digital banks are purely digital, so there, their operating costs are probably lower. So that's a challenge also that the traditional banks have on top of that. And when you look at the typical bank balance sheet compared to a typical company, I mean, you're going to see obviously the assets and the liabilities are so credit totals and equity holders. But what is different is that on the liability side, you're going to have money that is not owned by the bank in the sense of deposits, of savings accounts, securities accounts, when a customer buys securities, this is not owned by the bank, but the bank is allowed to do is to take that money and give it to somebody else. So this is what they call the earnings asset side. So the bank in fact has, if you look at the balance sheet of the bank, it's like they would have to balance sheet inside. And there is one balance sheet, 1 asset and liability part and portion of the bank's balance sheet. That is like a separate organization to make it simple, like a separate company. It's what customers bring in and what the bank is doing with that money. But at the very end of the day, you have to give the full amount of the assets back to the liability holders, where the bank will earn money on that part of thing which is not related to fees, is when they able to give some kind of, let's say, return to the liability holders. So let's say a 1% on a bank savings account. And if with that money they can earn a 5% difference between the two will be in fact a profit for the bank. So this is what is really specific about how to do bank valuations. And on top of that comes that when customers, for example, make Money deposits in the bank. The bank cannot just take 100% of the deposits and invest them in other assets, does some regulatory requirements. Some of you may have heard about the Basel regulations. One dot 23123, sorry, Basel regulations where there is a certain substance of the deposits that the bank is obliged by regulation to keep as equity capital, sorry, in their balance sheets. And, and as a result, in fact, when you look at the bank, I mean, the valuation story about bangs is really that you're going to be looking at the book value. I mean, we have been discussing this in the acid-base variation chapter. And the book value is a much more meaningful measure of value because the banks carry so much money that they, that they do not own. That comes from liability, let's say holder. So customers bring in deposits doing savings, and they are generating assets like a loan where other customers are, it's like an accounts receivable versus accounts payable. So those customers have to pay back the bank on the loan mortgage with some interest rates. So, and in between the two, the difference is whether the bank is doing a profit. And typically when we look at banks, and I'm going to show the example of Bank of America and Wells Fargo. You're going to be looking at book value. And I do really believe that book value and other investors believe that book value, when you look at the bag, is a much more meaningful measure of a share. Then other kind of like free cash flow to the firm, for example, that would not work on a bank. You also going to be using for, when you look at banks, you're going to not be using return on invested capital because you would be looking at full depth and equity, but you're going to be more using return on tangible common equity. So when you look at financial reports of banks, you're going to look at the profitability and the way how they generate money by looking at the return on common tangible equity. And one of the ways of looking at bank as well, and that does work is when banks pay out dividends that you can definitely use free cash flow to equity valuation method. So remember chapter number three going concern evaluation. So not free cash flow to the firm. So not DCF, DC, and discounted future earnings, but definitely the dividend discount model and Gordon Growth Model is a way for determining the bank valuation. And when you look at Bank of America and this is an extract of the 2019 annual report. So I mean, when you look at most of the larger banks, the big banks, they're going to be indeed pre calculating for you the book value per common share and the tangible book value per common share. And comparing it to the market price per common share. So this is a way, and you see also on the right-hand side, they also let say precalculated return. On average, tangible common share holders equity. So you could say is 10 percent goods are not well Bank of America, and remember Warren Buffett or you may know that warm often had been, if I'm not mistaken, a big investor into Bank of America. So they are indeed ways of measuring the violation of the bank. But you need to look at the book value. You need to look at dividend discount model and maybe Gordon Growth Model as well. Do not use free cash flow to the firm, but do use free cashflow to equity and Wells Fargo. Same here you see that in 2019 annual report, they are pre calculating the book value as well. So you see here it's at 40 dot 331 according to them. And you'll see that the book value has been increasing. So just be mindful when you look at the balance sheet of a bank, that you have a lot of assets and liabilities that are external, that are linked to customers. And you need really to think that you need to separate those liabilities like the customer deposits and the related investments. So that the bang is just playing the role of an intermediate between having that liability and taking the liability and making money out of that. And the difference between the two is where the money will come in from. The bank and the bank will be doing a profit. But at the very end It's a net-net near, nearly or very close to 0 operation between the liability side and the, the, let's say the earning assets side of a bank. But really think that it's like imagine that you would have a balance sheet inside the balance sheet of a bank. So you really need to separate what is external versus what is internal. And this is what we're looking at, book value and return on tangible common equity and also the dividend discount model and Gordon Growth Model that can work for banks as well. So with that wrapping up chapter number 5, I hope that it was interesting to have my perspective on this. Merger and acquisitions. They're from a valuation perspective are kind of summarized on the M&A part. We were mostly discussing where goodwill is coming from. So that is the premium on top of the federation of the assets on private equity venture capital. I was trying to show you that in the VC space, probably you're going to be looking at multiple revenue or other, let's say, gut feeling attributes that are much more speculative on private equity as a company will already exist, be more mature, you can already apply free cash flow to the firm. So discounted cashflow, discounted future earning earnings methods, probably you will be able to use in private equity space as well. Everything that has asset-based valuation that with the premium to it. So the goodwill conversation that we saw in the M&A and then when you go into public equity, So maybe before I say that in private equity, those companies probably will not be paying out dividends. So doing share buybacks. So you will not be able to use free cashflow to the equity, but in public equity space so that depending where you are investing into, you can either use multiple revenue when it is a company that is still having negative earnings, you can use multiple earnings. So the relative valuation price to earnings peg. We have seen that there you can in public equity US nearly the full fledged methods that we have been looking into Chapter 2's, chapter three, and chapter four. Chapter four being relative valuation, chapter 2 and 3 being asset-based valuation and going concern but asynch so 23, remember what absolute valuation methods and chapter 4 was relative valuation. Then we will discussing IPOs, DPOs. So I was trying to explain to you what is my view, my perspective and IPOs DPOs. Ipos DPOs can be very successful. But again, I mean, for me it's too speculative. I would not invest into it, but maybe it's your choice and I hope that at least I was able to open a little bit your eyes on where to find information and how to think about IPOs, DPOs you and you may have, and I was shooting this year with GoPro axiom Fitbit. You may have some clues about the companies how they gonna do in the future. But remember the Fitbits, GoPro versus Etsy. Etsy was having negative EPS and they turn positive. And you have done a lot of money. And the other ones, they were positive and when they went IPO, they went negative. So you would have been destroying your money. Then last but not least assets. And we wrapped up here in this lecture is on the bank. So think about banks in terms of special valuation scenario because there is a balance sheet inside the balance sheet with the customer deposits and the loans that are given to external customers who knew really need to separate these when you read the balance sheet of a bank. We're wrapping up chapter number 5 and in chapter number 6, there's going to be a conclusion also explaining to you the companion datasheet that is part of the course. Thank you. 23. Conclusion: All right, investors, you actually made it through the other company valuation training. This is the conclusion lecture we're going to be discussing, like my closing words, wrapping up everything that we have been looking into in the hope that with that, you will be able to be a better investor by knowing how to validate companies depending or independently if you are in the VC space, private equity space, or public equity space. So if I kind of wrap up what we have seen through this course or a memo. It was a company evaluation focused course. So the core as I was introducing in very early lectures was Chapters 2, 3, and 4. So we started with absolute valuation and we started looking at the balance sheet of the company and looking at the market cap of the company and trying to adjust the balance sheet of the company. Because some assets may be like lands, the brand value in the intangible part, they were on the valid or carried at cost. So this is what we were looking at, is what is the company worth today? And we extend the chapter number two by chapter number three, because normally a good investor is not only buying a company for what it has in terms of assets today, but what those assets would generate in terms of future cash-flows and future earnings. And this is why and where in chapter number three, we were looking at multiple revenue, multiple earnings method. You remember I mentioned that I do not like multiple revenue methods because my investment universe are blue chips that and those companies, they do make profits. I do need to look at multiple revenue. I can look at multiple earnings. Then we went really deep into free cash flow to the firm and discussing the cost of capital, how to determine the cost of capital with some external sources. And then we will look into Free Cash Flow to Equity. And you remember was commenting that typically when I invest into blue chips, I like to have a 25 to 30 percent undervaluation of the company. And while my money sit still that every year I get passive passive stream of revenues that would typically, I would typically be looking at free cash flow to equity, so dividends or share buybacks, those kind of things. And then in chapter number four, we looked into relative valuation. And remember I said that 20 years ago I started with relative valuation because it was much more easy for me than understanding absolute valuation. But in the meantime, I believe that only looking at relative valuation is I will not say risky, but I think a good investor should be able to understand also absolute valuation methods if it has acid-base or going concern. And I would say the minimum would be the going concern if you're investing into public equity. And specifically in the going concern attributed free cashflow to the front. That's the minimum that allow me to say I would be expecting from you. So in relative valuation, remember the advantages is that word that those, it's very easy to those relative valuation measures and metrics to compare a company with company B on industry with another industry. So there we were discussing price to book, price to cash flow price, earnings price to sales, but also the packet, the price to earnings to growth. And also the enterprise value to EBITDA, EBITDA measures. And you have seen I was giving examples on the Morningstar side how to do the interpretation of them. And those ratios are very often precalculated. You're gonna find them on funds or yahoo.com, on Reuters, on Bloomberg. You're going to find them as well on Morningstar and a lot of public, let's say stock exchange related sites, information sites. The key thing when and again when you speak about company valuation, and I hope that not only you have understood which methods exists, but also when we were discussing in chapter number 5, which methods to apply depending if you're in the startup VC investment space or investment universe, if you're on private equity or if you're in public equity that you need. I think this diagram is very important on because the companies, they go through different life cycle. It's typically you have a company that isn't the launch phase, then it goes into a very strong growth, growth phase. Then the company becomes mature. And if a company is not innovating, the company will decline. So that's a typical cycle. And related to that, you're going to see profits and cash that will follow kind of that curve even though the cash generation. So the way, or let's say the moment that the company creates new cash from existing assets will come later. And he's always like shifted from the stage of the company is in. So first accompany will grow very high, then it will start slowly generating profits and gaining market share, getting customers. And it's only, and there's going to be like a shift of at least one face or one cycle where only after that indeed cash is coming in. So remember, what I was saying is that when you are in the VC space and the company is having negative cash and negative profits, you will not be able to use free cash flow to the firm. You will not be able to use Free Cash Flow to Equity. You may use asset-based valuation and you may use multiple revenues method or price to sales methods, but all the other methods will not be compelling when you're on the private equity space, probably the company is already doing some kind of profit and he's already printing cash. So fresh money. So then you're going to most probably be using methods that could be close to the VC methods, but you will be able to start adding free cash flow to the firm methods that you didn't have before and others you relative valuation methods as well. And then when the company becomes a that goes through an IPO, DPO becomes public company at a certain time when the company isn't the maturity phase, it will start paying out dividends or doing share buybacks because it does not have better capital allocation opportunities. So it's better to give the money back to the shareholders instead of destroying value by allocating that money into bad capital investments or capital vehicles. And there you will be able to add to all the methods that we have seen so far. We were not talking about free cash flow to equity there probably as dividends are coming in and share buybacks are happening, we'll be able to add. The previous methods, you will be able to add Free Cash Flow to Equity method as well. So dividends, dividend, discount model, Gordon Growth Model, and Total Shareholder Yield that include share buybacks as well. So keep peacekeepers in mind. So depending if you're on the VC space, private equity space or public equity space, that the methods that you're going to be using are in fact to be adapted. They will be different. And remember the very end of the day is, the intention is that when you put your money into something, is that you find undervalued companies so that you have a safety margin. What I cannot really tell you here when you are looking into the VCM and specifically private equity space, it does not happen very often in the private equity space that you're going to find undervalued companies, you are just buying in the VCM and private equity space you will probably be buying, let's say, future earnings and very high expectations. And depending if the market is depressed, and I'm really mean here of the public market is depressed. Probably the valuation multiples will go up and down. Remember the.com bubble in the year 2000 that when births at a certain moment in time. So, but I believe that on the public equity, on the secondary market, value have higher chances of finding undervalued companies. This is my play, this is my, my investment universe that I'm investing to butchers. But again, you may be an I hope and I wish you that you're going to be a very successful investor, maybe in VC or private equity space as well. But remember that your written expectations have to be high because you have to be a risk adjusted. And remember, and I hope that through the examples were discussing a lot Reshma carrying Apple, Microsoft. I was showing you at the Bank of America, Wells Fargo balance sheet as well. I mean, always keep in mind that theory is not enough. You need to practice, you need to practice your eye. And this is really, really important. If you want to become a successful investor, you really need to go beyond theory. You need to go beyond the virtual portfolios or virtual investment portfolios and put your real money, your real savings, into real investments and into real companies. And this is really what I, what I also mean is that do not forget that when you're putting your money into a company, it is a VC company, a private equity company, a public equity company. That's a real business. It's not just a ticker behind the screen. Those are, there are people behind those companies that are really business opportunities behind it. So you need to, I mean, judgement is required. This is why also the I'm calling this course as well, the odd of company valuation because judgment you will need to do some judgments and arbitrations at a certain moment in time. So if a kind of summarize what we have been seeing here, and if I can give you some kind of, let's say a one slider rule sets on, on how to summarize up this course. The first one is you need to determine your investment universe. First of all, I you a triple F angel, VC, or private equity. So primary market and secondary market investor. Even in the secondary market, you can invest into growth stocks or value stocks. I'm a value secondary market investor. Then also you need to determine your cost of capital and also the risk premium that comes with to that with the, with your investment universe. So remember when I was walking through the Pepperdine report that obviously if you're investing into triple F vehicles of VC vehicles, you expect the returns will be beyond 30, 40%. If you're investing into mature companies in the private equity space, probably you're going to be at maybe between 15 and 25 percent, depending on the company attributes. And when you're investing into secondary market value stocks, I'm, I'm very happy with six to 7% annual return. While if you invest into growth stocks. So for example, companies that went IPO and went into the secondary market, they are probably also expectations have to be higher because the risk associated is higher. So you need to risk adjust your returns depending on your investment universe. And now what's showing you how to estimate or to calculate the cost of capital if it is through the Pepperdine reports examples or as well through the motor neuron. Cost of capital conversations and tables that he's doing PR industry. And also linking this to the industry but to the geography and the risks, the risk spread related to how the rating agency looks at the depth and quality of companies as well. And so my person valuation method is I do combine absolute and relative valuation. And typically the tests that I do is I am expecting to be able to buy companies at 25 to 30 percent below the intrinsic value. And for that I'm using discounted cashflow and his country's future earnings with a 30-year horizon without terminal value. And as I said, while my money sit still, while I hope that the market will do the necessary correction that I can gain, this safety margin, that there's going to be a capital appreciation of my investment. During that time, I want to see passive revenue streams coming to me. So I'm using dividend discount model, gone growth until the shoulder here, which includes share buybacks. And when I also look into a value investments in the secondary market, I also use adjusted acid method, and I do look at the price to book value and the adjusted book value of the company. Then when I look at relative ratios, as I said, my, I want to have a p that is below 15 UPN and B that is below three, price to cash where that is also below 20. What is for me really, really key at the very end of the day is two vehicles. The first one is buying company that is currently undervalued by the market by at least 25 to 30 percent. And at the same time, my second return vehicle is why I have to be patient because it may take a couple of years. I want to have this passive stream of revenue is coming to me through a typical share buybacks or dividends. To me. There's going to be companion file. I'm gonna do a specific appendix walking you through the companion file. But a lot of the figures that we have been practicing are part of this course as well. And it's going to be specific appendix on it. And last but not least, remember that here this training is specifically on company evaluation and only on company valuation, but there are other courses. There is a beginner course for stock markets, but I presume this is not one for you because otherwise you would not have been doing this course. And other courses. There is one that is pretty complete, that's the other value investing where I'm looking also at mode and intangible metrics around competition and to determine if it's a good investment or not. And then for the dividend investors, there's a specific training on dividend investing. So last but not least, and I have to bring in this disclaimer. I mean, at no moment in time, I'm soliciting you in buying a the VC, PE, public equity, whatever instruments. I'm just trying really to share my knowledge with you in the hope that it will maybe allow you to be a better investor. But obviously at the very end of the day you have the accountability of where you're putting your money into and if you become super successful by investing into Bitcoin, great, I'm happy for you. But at the very end of the day, I'm just sharing my knowledge with you and how I practice very investing since 20 years. So with that, thank you for joining this training. Remember that I'm organizing a monthly webinar where you can join and ask all kinds of questions. And if you send them in advance To me, there is no registration required for it. You will be able to also send the questions in advance or there can appropriately prepare for the monthly webinar. And last but not least, you have my contact information in case you would have a need for a specific question that you don't want our race through the Q&A section. I mean, do not hesitate to reach out to me with that. Thank you for your patients and hope that you have been learning out of this company variation training and hope to see you in one of the future, either webinars or trainings. Thank you.