From 05f1636841dd4d2740cf16695fc68948e9768766 Mon Sep 17 00:00:00 2001 From: ronny abraham Date: Tue, 22 Jul 2025 16:32:53 +0300 Subject: [PATCH] started dcf --- mba/ch65.org | 254 +++++++++++++++++++++++++++++++++++++++++++++++++++ 1 file changed, 254 insertions(+) diff --git a/mba/ch65.org b/mba/ch65.org index 586297f..4cdc9be 100644 --- a/mba/ch65.org +++ b/mba/ch65.org @@ -6,4 +6,258 @@ - [[./../mba-main.org][TOC | Business]] - [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/4317198#overview][S12:L65 course video]] + * notes +** take the average of three valuations +- price / earnings +- price / sales +- [[#dcf][Discounted Cash Flow (DCF)]] + - because cash flow is similar to net income for tech stocks it makes things easier [[#cashflow-diff][link 1]] [[#cashflow-diff-real][link 2]] + + - DCF is the value of all future cash flows discounted today + +* definitions +** Discounted Cash Flow (DCF) +:PROPERTIES: +:CUSTOM_ID: dcf +:END: + +*** What is DCF? +Discounted Cash Flow (DCF) is a financial valuation method used to estimate the *present value* of an investment or business based on its *expected future cash flows*. + +The core idea: *money today is worth more than money tomorrow*, due to the time value of money. DCF discounts future expected cash flows back to their present value using a discount rate (usually the cost of capital). + +*** Formula +#+BEGIN_SRC latex +\text{DCF} = \sum_{t=1}^{n} \frac{CF_t}{(1 + r)^t} +#+END_SRC + +- \( CF_t \): Cash flow at time \( t \) +- \( r \): Discount rate (e.g., 10%) +- \( n \): Number of years or periods + +*** Example +You're evaluating a business expected to generate the following cash flows: + +- Year 1: $100,000 +- Year 2: $110,000 +- Year 3: $120,000 +- Discount rate: 10% + +#+BEGIN_SRC latex +\text{DCF} = \frac{100{,}000}{(1.10)^1} + \frac{110{,}000}{(1.10)^2} + \frac{120{,}000}{(1.10)^3} += 90{,}909 + 90{,}909 + 90{,}163 ≈ \$272{,}000 +#+END_SRC + +*** When to Use DCF +- When valuing businesses with predictable cash flows +- To assess investment or project viability +- To compare multiple investment opportunities + +*** Notes +- DCF can include a *terminal value* if the business continues beyond the forecast period +- Highly sensitive to discount rate and cash flow assumptions + +** Difference Between Cash Flow and Net Income +:PROPERTIES: +:CUSTOM_ID: cashflow-diff +:END: + +The difference between cash flow and net income lies in *timing* and *accounting method* — they measure different things. + +*** ✅ Net Income +The company’s *profit* after all revenues and expenses are accounted for, based on accrual accounting. + +- Appears on the income statement +- Includes non-cash items like depreciation and amortization +- Includes revenues earned and expenses incurred, even if no cash has changed hands yet +- Formula: + +#+BEGIN_SRC text +Net Income = Revenue - Expenses (including non-cash and interest/taxes) +#+END_SRC + +*** ✅ Cash Flow +The *actual cash* moving into and out of the business during a period. + +- Appears on the cash flow statement +- Based on cash accounting +- Only counts real money in/out, regardless of when it was earned or incurred +- Includes operations, investing, and financing activities +- Formula (Operating Cash Flow): + +#+BEGIN_SRC text +Cash Flow from Ops = Net Income + + Non-cash expenses (e.g. depreciation) + - Changes in working capital +#+END_SRC + +*** 🧠 Key Differences + +| Feature | Net Income | Cash Flow | +|---------------------------------+---------------------------+----------------------------------| +| Basis | Accrual accounting | Cash accounting | +| Includes non-cash? | Yes (depreciation, etc.) | No | +| Timing of transactions | Matches earnings period | Based on actual cash movement | +| Found on | Income statement | Cash flow statement | +| Reflects profitability? | Yes | No, it reflects liquidity | +| Negative while other is positive?| Yes | Yes — e.g., due to non-cash charges | + +*** 🔍 Example +- A company sells $10,000 of goods but hasn’t been paid yet. + - Net Income: Shows the $10,000 as revenue. + +** Is net income more similar to cash flow in terms of a tech stock? +:PROPERTIES: +:CUSTOM_ID: cashflow-diff-real +:END: + +That is, do we effectively consider it the same when doing evaluations for tech stocks as opposed to other industries? + +Great question — and the answer is *no*, net income is not considered equivalent to cash flow, even for tech stocks — though the relationship can be closer or more misleading depending on the business model. + +*** ✅ Tech Stocks Often Emphasize Free Cash Flow (FCF) More Than Net Income + +Why? + +- Tech companies (especially SaaS) tend to have: + - High non-cash expenses (like stock-based compensation and depreciation of capitalized R&D) + - Deferred revenue (prepaid subscriptions) + - Low capital expenditure needs + +These factors can cause net income to look worse than actual cash performance. + +So analysts often disregard net income in favor of: + +- Operating cash flow +- Free cash flow (FCF): + +#+BEGIN_SRC latex +\text{FCF} = \text{Operating Cash Flow} - \text{CapEx} +#+END_SRC + +*** 📊 Example: Tech Company X + +| Metric | Value | +|---------------------------+---------------| +| Net income | $5 million | +| Stock-based compensation | $10 million | +| Depreciation | $3 million | +| CapEx [[#capex][(link)]] | $2 million | +| Operating cash flow | $18 million | +| Free cash flow | $16 million | + +➡️ The net income looks modest, but the free cash flow is much stronger — this is what investors in tech tend to value more. + +*** 🔁 Compare with Other Industries + +| Industry | Preferred Metric | Why | +|--------------+----------------------------+----------------------------------------| +| Tech (SaaS) | Free Cash Flow | Low cape, high non-cash costs | +| Utilities | Net Income + Dividends | Stable earnings, regulated cash flow | +| Oil & Gas | EBITDA / FCF | High depreciation, volatile capex | +| Banks | Net Income (GAAP adjusted) | Highly regulated balance sheets | + +*** 🧠 Conclusion + +- No, net income ≠ cash flow for tech stocks +- In fact, net income may understate performance due to: + - High non-cash expenses (e.g., stock comp) + - Accounting rules around R&D and subscriptions +- DCF models for tech should focus on FCF or adjusted EBITDA, not just net income - Cash Flow: $0 until cash is actually received. + +** CapEx – Capital Expenditures +:PROPERTIES: +:CUSTOM_ID: capex +:END: + +*** What is CapEx? +CapEx stands for *Capital Expenditures* — it refers to money a company spends to acquire, upgrade, or maintain physical assets such as: + +- Equipment +- Buildings +- Vehicles +- Technology infrastructure +- Property + +*** In Plain Terms +CapEx is money spent on things that last more than one year — unlike operating expenses (OpEx), which are day-to-day costs like rent, salaries, or utilities. + +*** Accounting Treatment +- CapEx is not expensed all at once on the income statement. +- It’s capitalized — added to the balance sheet as an asset — and then depreciated over time. + +*** Examples + +| Action | CapEx? | +|-----------------------+----------------| +| Buying servers | ✅ Yes | +| Repainting the office | ❌ No (OpEx) | +| Building a data center| ✅ Yes | +| Paying engineers | ❌ No (OpEx) | + +*** CapEx in Valuation +- Important in Free Cash Flow (FCF) calculations: + +#+BEGIN_SRC latex +\text{FCF} = \text{Operating Cash Flow} - \text{CapEx} +#+END_SRC + +- High-growth tech companies often have low CapEx, which boosts FCF and valuation. +- Asset-heavy companies (like telecom, energy, or manufacturing) have high CapEx, reducing FCF. + +** EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization + +*** What is EBITDA? +EBITDA is a measure of a company’s core operational profitability. It strips out the effects of financing decisions, tax environments, and non-cash accounting items like depreciation and amortization. + +*** Purpose +EBITDA is commonly used to: +- Assess a company’s operating performance +- Compare companies across industries +- Approximate cash flow (roughly) + +*** Formula + +From Net Income: +#+BEGIN_SRC text +EBITDA = Net Income + + Interest + + Taxes + + Depreciation + + Amortization +#+END_SRC + +From Operating Income (EBIT): +#+BEGIN_SRC text +EBITDA = Operating Income + + Depreciation + + Amortization +#+END_SRC + +*** Why Use EBITDA? + +| Benefit | Explanation | +|--------------------------+----------------------------------------------------| +| Strip out accounting noise | Removes non-cash charges like depreciation | +| Cross-industry comparison | Ignores capital structure and tax regime effects | +| Cash flow proxy | Gives a rough estimate of operating cash flow | + +*** Cautions +- EBITDA is *not* actual cash flow. +- It ignores capital expenditures and changes in working capital. +- It can be used to obscure poor net income performance. +- Not suitable for asset-heavy businesses as it omits large CapEx burdens. + +*** Example +Suppose a company reports: + +- Net Income: $1,000,000 +- Interest: $500,000 +- Taxes: $400,000 +- Depreciation: $300,000 +- Amortization: $200,000 + +#+BEGIN_SRC text +EBITDA = 1,000,000 + 500,000 + 400,000 + 300,000 + 200,000 = $2,400,000 +#+END_SRC