10 KiB
10 KiB
Section 9 | Lesson 50 - How to Value Private Companies and Growth Methods
- Links
- Notes
Links
Notes
Financial Table
| Year | 2015 | 2016 | 2017 | 2018 |
|---|---|---|---|---|
| Revenue | 2,000,000 | 20,000,000 | 350,000,000 | 661,500,000 |
| COGS (Cost of Goods Sold) | 1,800,000 | 16,000,000 | 175,000,000 | 264,600,000 |
| Gross Profit | 200,000 | 4,000,000 | 175,000,000 | 396,900,000 |
| Gross Margin % | 10% | 20% | 50% | 60% |
| Gross Profit = Revenue - COGS | ||||
| GM pct = Gross Profit / Revenue |
Financial Table: Operating Expenses
| Category | 2015 | 2016 | 2017 | 2018 |
|---|---|---|---|---|
| Sales & Marketing | ₪500,000.00 | ₪4,000,000.00 | ₪66,500,000.00 | ₪112,455,000.00 |
| % of sales | 25% | 20% | 19% | 17% |
| % YOY | ||||
| General & Administrative | ₪500,000.00 | ₪4,000,000.00 | ₪66,500,000.00 | ₪112,455,000.00 |
| % of sales | 25% | 20% | 19% | 17% |
| % YOY | ||||
| Research & Development | ₪4,000,000.00 | ₪20,000,000.00 | ₪24,500,000.00 | ₪26,460,000.00 |
| % of sales | 200% | 100% | 7% | 4% |
| % YOY | ||||
| Operating Expenses Total | ₪5,000,000.00 | ₪28,000,000.00 | ₪157,500,000.00 | ₪251,370,000.00 |
Operating Expenses
these can also be found in every company
- Sales & Marketing
- General & Administrative
- Research & Development
how to calculate
-
go see similar publicly traded companies and find out what percent of revenue/sales
- security and exchange commision requires all publicly traded companies to put this up
- from the initial point we make assumptions
Operating Profit (EBIT)
- the company is breaking even when Total Operating Expenses equals or exceeds Gross Profit
- In the example, this occurs in year 2017
\[ \text{Operating Profit (EBIT)} = \text{Gross Profit} - \text{Operating Expenses Total} \]
Key Components of EBIT
- Revenue: Total income from sales or services.
- COGS (Cost of Goods Sold): The direct costs of producing the goods or services sold by the company.
- Gross Profit: Revenue minus COGS.
-
Operating Expenses: Costs not directly tied to production, such as:
- Sales & Marketing
- General & Administrative (G&A)
- Research & Development (R&D)
Why EBIT Is Important
- Operational Focus: EBIT shows how efficiently a company runs its operations without considering external factors like financing (interest) or tax obligations.
- Comparison: Useful for comparing companies in the same industry, as it ignores the effects of different tax rates and financing structures.
- Profitability Analysis: Highlights whether the core business is profitable.
What is YOY?
Definition
YOY stands for Year-over-Year. It is a method of comparing data from one period (usually a year) to the same period in the previous year. YOY is often used in business, finance, and economics to evaluate growth, performance, or trends over time.
Formula
\[ \text{YOY % Change} = \frac{\text{Current Year Value} - \text{Previous Year Value}}{\text{Previous Year Value}} \times 100 \]
Why YOY Is Important
- Growth Analysis: YOY highlights whether a metric (like revenue, profit, or expenses) is increasing or decreasing compared to the previous year.
- Seasonal Neutrality: YOY comparisons help account for seasonality, as the same time periods are compared.
- Trend Insights: Helps identify long-term trends and patterns by consistently comparing yearly changes.
Example
Calculate YOY for Revenue:
| Year | Revenue (₪) | YOY % Change |
|---|---|---|
| 2016 | ₪20,000,000.00 | \((20,000,000 - 2,000,000) / 2,000,000 \times 100 = 900\%\) |
| 2017 | ₪350,000,000.00 | \((350,000,000 - 20,000,000) / 20,000,000 \times 100 = 1650\%\) |
| 2018 | ₪661,500,000.00 | \((661,500,000 - 350,000,000) / 350,000,000 \times 100 = 89\%\) |
| 2019 | ₪999,600,000.00 | \((999,600,000 - 661,500,000) / 661,500,000 \times 100 = 51\%\) |
| 2020 | ₪1,399,440,000.00 | \((1,399,440,000 - 999,600,000) / 999,600,000 \times 100 = 40\%\) |
Updated Financial Table
| Year | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
|---|---|---|---|---|---|---|
| Revenue | ₪2,000,000 | ₪20,000,000 | ₪350,000,000 | ₪661,500,000 | ₪999,600,000 | ₪1,399,440,000 |
| COGS (Cost of Goods Sold) | ₪1,800,000 | ₪16,000,000 | ₪175,000,000 | ₪264,600,000 | ₪299,880,000 | ₪279,888,000 |
| Gross Profit | ₪200,000 | ₪4,000,000 | ₪175,000,000 | ₪396,900,000 | ₪699,720,000 | ₪1,119,552,000 |
| Gross Margin % | 10% | 20% | 50% | 60% | 70% | 80% |
| YOY | 0 | 900% | 1650% | 89% | 51% | 40% |
| Gross Profit = Revenue - COGS | ||||||
| GM pct = Gross Profit / Revenue |
Uses of YOY
- Revenue Growth: Are sales increasing year over year?
- Expense Management: Are costs growing faster than revenue?
- Profitability Trends: Is the business becoming more or less profitable over time?
- Operational Insights: Are marketing or R&D expenses increasing efficiently year over year?
taxes and interest
| 2015 | 2016 | 2017 | |
|---|---|---|---|
| Revenue | ₪2,000,000 | ₪20,000,000 | ₪350,000,000 |
| COGS (Cost of Goods Sold) | ₪1,800,000 | ₪16,000,000 | ₪175,000,000 |
| Gross Profit (Revenue - COGS) | ₪200,000 | ₪4,000,000 | ₪175,000,000 |
| Total Operating Expenses | ₪5,000,000 | ₪28,000,000 | ₪157,500,000 |
| EBIT (Gross Profit - TOE) | -₪4,800,00 | -₪24,000,000 | ₪17,500,000 |
| Interest | ₪85,000.00 | ||
| Tax | ₪4,250,000.00 | ||
| % of EBIT | 24.29% |
% of EBIT formula
\[ \text{Tax as \% of EBIT} = \left( \frac{\text{Tax Amount}}{\text{EBIT}} \right) \times 100 \]
Why No Taxes Before 2017?
Taxes Are Based on Profit (EBIT)
- Corporate taxes are typically calculated as a percentage of profit (Earnings Before Interest and Taxes, EBIT).
- If the EBIT is negative (i.e., the company has an operating loss), there’s no taxable income, and thus no corporate income tax is owed.
Losses in 2015 and 2016
-
EBIT values:
- 2015: -₪4,800,000
- 2016: -₪24,000,000
- Since the company had operating losses during these years, there was no taxable profit.
Profit in 2017
- EBIT in 2017: ₪17,500,000.
- By 2017, the company had a positive EBIT, meaning taxable profit existed, and taxes were applied from that year onward.
How Losses Affect Taxes - Loss Carryforward
- Many tax systems allow companies to carry forward losses from previous years to offset future taxable income.
- Loss carryforwards reduce taxes owed in profitable years.
No Tax Obligation Without Profit
- If a company doesn’t generate profit, it generally doesn’t pay income taxes.
- Other taxes (e.g., payroll, VAT, property taxes) may still apply.
Conclusion
- Taxes weren’t calculated before 2017 because the company didn’t have taxable profit.
- Once the company turned a profit in 2017, taxes were applied.
IP Valuation: Growth vs Value
- Assume an Initial Public Offering (IPO) in 2020
- Based on the Financial data given, how and what will different types of investors PAY for this company
Growth Investors
-
focus on revenue as the primary metric
- especially for high growth companies
- take the revenue in the year of the IP and multiply it by 10, that is what they will pay
\[ \text{Growth Investor Valuation} = \text{Revenue for IPO Year} \times 10 \]
Value Investors
-
focus on current profitability (earnings, ie EBIT)
- lower valuations for high growth companies
- high growth companies reinvest profits into expansion, research, etc.
\[ \text{Value Investor Valuation} = \text{EBIT for IPO Year} \times 10 \]