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310 lines
18 KiB
Org Mode
#+title: Section 9 | Lesson 50 - How to Value Private Companies and Growth Methods
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#+HTML_HEAD: <link rel="stylesheet" type="text/css" href="../_share/media/css/org-media-sass/categories/business.css" />
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* Links
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- [[./../mba-main.org][TOC | Business]]
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- [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/5805330#overview][S09:L50. How To Value Private Companies the Easy Way & Growth Methods]]
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- tables: [[file:../_data/market share spreadsheet.numbers][Market Share Spreadsheet.numbers]]
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* Notes
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** Financial Table
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| Year | 2015 | 2016 | 2017 | 2018 |
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|-----------------------------------+-----------+------------+-------------+-------------|
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| Revenue | 2,000,000 | 20,000,000 | 350,000,000 | 661,500,000 |
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| COGS (Cost of Goods Sold) | 1,800,000 | 16,000,000 | 175,000,000 | 264,600,000 |
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| Gross Profit | 200,000 | 4,000,000 | 175,000,000 | 396,900,000 |
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| Gross Margin % | 10% | 20% | 50% | 60% |
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|-----------------------------------+-----------+------------+-------------+-------------|
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| *Gross Profit = Revenue - COGS* | | | | |
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| *GM pct = Gross Profit / Revenue* | | | | |
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** Financial Table: Operating Expenses
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| Category | 2015 | 2016 | 2017 | 2018 |
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|----------------------------+---------------+----------------+-----------------+-----------------|
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| Sales & Marketing | ₪500,000.00 | ₪4,000,000.00 | ₪66,500,000.00 | ₪112,455,000.00 |
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| % of sales | 25% | 20% | 19% | 17% |
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| % YOY | | | | |
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|----------------------------+---------------+----------------+-----------------+-----------------|
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| General & Administrative | ₪500,000.00 | ₪4,000,000.00 | ₪66,500,000.00 | ₪112,455,000.00 |
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| % of sales | 25% | 20% | 19% | 17% |
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| % YOY | | | | |
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|----------------------------+---------------+----------------+-----------------+-----------------|
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| Research & Development | ₪4,000,000.00 | ₪20,000,000.00 | ₪24,500,000.00 | ₪26,460,000.00 |
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| % of sales | 200% | 100% | 7% | 4% |
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| % YOY | | | | |
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|----------------------------+---------------+----------------+-----------------+-----------------|
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| *Operating Expenses Total* | ₪5,000,000.00 | ₪28,000,000.00 | ₪157,500,000.00 | ₪251,370,000.00 |
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*** Operating Expenses
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these can also be found in every company
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- Sales & Marketing
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- General & Administrative
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- Research & Development
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*** how to calculate
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1. go see similar publicly traded companies and find out what percent of revenue/sales
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- security and exchange commision requires all publicly traded companies to put this up
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2. from the initial point we make assumptions
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** Operating Profit (EBIT)
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- the company is breaking even when Total Operating Expenses equals or exceeds Gross Profit
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- In the example, this occurs in year 2017
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\[ \text{Operating Profit (EBIT)} = \text{Gross Profit} - \text{Operating Expenses Total} \]
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*** Key Components of EBIT
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1. *Revenue*: Total income from sales or services.
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2. *COGS (Cost of Goods Sold)*: The direct costs of producing the goods or services sold by the company.
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3. *Gross Profit*: Revenue minus COGS.
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4. *Operating Expenses*: Costs not directly tied to production, such as:
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- Sales & Marketing
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- General & Administrative (G&A)
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- Research & Development (R&D)
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*** Why EBIT Is Important
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1. *Operational Focus*: EBIT shows how efficiently a company runs its operations without considering external factors like financing (interest) or tax obligations.
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2. *Comparison*: Useful for comparing companies in the same industry, as it ignores the effects of different tax rates and financing structures.
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3. *Profitability Analysis*: Highlights whether the core business is profitable.
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** What is YOY?
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*** Definition
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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.
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*** Formula
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\[ \text{YOY % Change} = \frac{\text{Current Year Value} - \text{Previous Year Value}}{\text{Previous Year Value}} \times 100 \]
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*** Why YOY Is Important
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1. *Growth Analysis*: YOY highlights whether a metric (like revenue, profit, or expenses) is increasing or decreasing compared to the previous year.
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2. *Seasonal Neutrality*: YOY comparisons help account for seasonality, as the same time periods are compared.
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3. *Trend Insights*: Helps identify long-term trends and patterns by consistently comparing yearly changes.
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*** Example
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Calculate YOY for *Revenue*:
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| Year | Revenue (₪) | YOY % Change |
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|------|-------------------|-----------------------------------------------|
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| 2016 | ₪20,000,000.00 | \((20,000,000 - 2,000,000) / 2,000,000 \times 100 = 900\%\) |
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| 2017 | ₪350,000,000.00 | \((350,000,000 - 20,000,000) / 20,000,000 \times 100 = 1650\%\) |
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| 2018 | ₪661,500,000.00 | \((661,500,000 - 350,000,000) / 350,000,000 \times 100 = 89\%\) |
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| 2019 | ₪999,600,000.00 | \((999,600,000 - 661,500,000) / 661,500,000 \times 100 = 51\%\) |
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| 2020 | ₪1,399,440,000.00 | \((1,399,440,000 - 999,600,000) / 999,600,000 \times 100 = 40\%\) |
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*** Updated Financial Table
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| Year | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
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|-----------------------------------+------------+-------------+--------------+--------------+--------------+----------------|
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| Revenue | ₪2,000,000 | ₪20,000,000 | ₪350,000,000 | ₪661,500,000 | ₪999,600,000 | ₪1,399,440,000 |
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| COGS (Cost of Goods Sold) | ₪1,800,000 | ₪16,000,000 | ₪175,000,000 | ₪264,600,000 | ₪299,880,000 | ₪279,888,000 |
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| Gross Profit | ₪200,000 | ₪4,000,000 | ₪175,000,000 | ₪396,900,000 | ₪699,720,000 | ₪1,119,552,000 |
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| Gross Margin % | 10% | 20% | 50% | 60% | 70% | 80% |
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| YOY | 0 | 900% | 1650% | 89% | 51% | 40% |
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|-----------------------------------+------------+-------------+--------------+--------------+--------------+----------------|
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| *Gross Profit = Revenue - COGS* | | | | | | |
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| *GM pct = Gross Profit / Revenue* | | | | | | |
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*** Uses of YOY
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1. *Revenue Growth*: Are sales increasing year over year?
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2. *Expense Management*: Are costs growing faster than revenue?
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3. *Profitability Trends*: Is the business becoming more or less profitable over time?
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4. *Operational Insights*: Are marketing or R&D expenses increasing efficiently year over year?
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** taxes and interest
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| | 2015 | 2016 | 2017 |
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|-------------------------------+------------+--------------+---------------|
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| Revenue | ₪2,000,000 | ₪20,000,000 | ₪350,000,000 |
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| COGS (Cost of Goods Sold) | ₪1,800,000 | ₪16,000,000 | ₪175,000,000 |
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| Gross Profit (Revenue - COGS) | ₪200,000 | ₪4,000,000 | ₪175,000,000 |
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| Total Operating Expenses | ₪5,000,000 | ₪28,000,000 | ₪157,500,000 |
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| EBIT (Gross Profit - TOE) | -₪4,800,00 | -₪24,000,000 | *₪17,500,000* |
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| Interest | | | ₪85,000.00 |
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| Tax | | | ₪4,250,000.00 |
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| % of EBIT | | | 24.29% |
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*** % of EBIT formula
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\[
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\text{Tax as \% of EBIT} = \left( \frac{\text{Tax Amount}}{\text{EBIT}} \right) \times 100
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\]
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*** Why No Taxes Before 2017?
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**** Taxes Are Based on Profit (EBIT)
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- Corporate taxes are typically calculated as a percentage of **profit** (Earnings Before Interest and Taxes, EBIT).
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- 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.
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**** Losses in 2015 and 2016
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- EBIT values:
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- 2015: -₪4,800,000
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- 2016: -₪24,000,000
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- Since the company had **operating losses** during these years, there was no taxable profit.
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**** Profit in 2017
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- EBIT in 2017: ₪17,500,000.
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- By 2017, the company had a positive EBIT, meaning taxable profit existed, and taxes were applied from that year onward.
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*** How Losses Affect Taxes - Loss Carryforward
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- Many tax systems allow companies to carry forward losses from previous years to offset future taxable income.
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- Loss carryforwards reduce taxes owed in profitable years.
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*** No Tax Obligation Without Profit
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- If a company doesn’t generate profit, it generally doesn’t pay income taxes.
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- Other taxes (e.g., payroll, VAT, property taxes) may still apply.
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*** Conclusion
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- Taxes weren’t calculated before 2017 because the company didn’t have taxable profit.
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- Once the company turned a profit in 2017, taxes were applied.
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** IP Valuation: Growth vs Value
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- *Assume an Initial Public Offering (IPO) in 2020*
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- Based on the Financial data given, how and what will different types of investors PAY for this company
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| Category | 2020 |
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|---------------------------------+-------------------|
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| Revenue | ₪1,399,440,000 |
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| EBIT (Gross Profit - TOE) | ₪657,736,800 |
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*** Growth Investors
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- focus on *revenue* as the primary metric
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- especially for high growth companies
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- take the revenue in the year of the IP and multiply it by 10, that is what they expect the company will be worth in 5 years
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\[
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\text{Growth Investor Valuation} = \text{Revenue for IPO Year} \times 10
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\]
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*** Value Investors
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- they look on the long term viability of a product vs it's fast growth
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- buy cheap, sell after many years
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- focus on *current profitability* (earnings, ie EBIT)
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- lower valuations for high growth companies
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- high growth companies reinvest profits into expansion, research, etc.
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\[
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\text{Value Investor Valuation} = \text{EBIT for IPO Year} \times 10
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\]
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*** Final valuations based on 2020 IPO
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assuming the IPO takes place in 2020 our valuation will be
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| Investor type | Formula | Projected Valuation in 5 Years (2025) |
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|------------------+--------------+----------------------------------------|
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| Growth Investors | Revenue x 10 | *₪13,994,400,000* |
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| Value Investors | EBIT x 10 | *₪6,577,368,000* |
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** sustainabile growth
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*** how it works
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- sustainable growth is the maximum growth rate a company can achieve without additional equity or debt financing
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\[
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\text{Sustainable Growth} = \frac{ \text{ending equity} - \text{beginning equity} }{\text{beginning equity}}
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\]
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- you want to grow BELOW the sustainable growth rate so as to not require outside help
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*** basic example
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| sustainability growth example | |
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|-------------------------------+------------------|
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| beginning equity | $ 351,597,690 |
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| ending equity | $ 860,108,490 |
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| sustainable growth rate | 145% |
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| 2020 growth rate | 98% |
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- not sure where he got the values for beg and ending equity. assuming it's from somewhere else because it doesn't actual match up
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- the values for growth rate probably come from EBIT or operational revenue, and if calculated using the growth rate formula, come out to 94% not 98%
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*** More extensive Example where dividend are 0
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| Column Name | Value | Formula / Notes |
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|---------------------------+----------------+-------------------------------------------------------|
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| Year | 2020 | |
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| Revenue | ₪1,399,440,000 | |
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| COGS (Cost of Goods Sold) | ₪279,888,000 | |
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| Gross Profit | ₪1,119,552,000 | Revenue - COGS (Cost of Goods Sold) |
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| Operating Expenses Total | ₪461,815,200 | |
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| Operating Profit (EBIT) | ₪657,736,800 | |
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| Interest | ₪85,000 | Given |
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| Tax | ₪159,764,269 | Assuming tax rate of 24.29% |
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| Net Income | ₪497,887,531 | Operating Profit - Interest - Tax |
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| Beginning Equity | ₪699,720,000 | |
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| Ending Equity | ₪1,197,607,531 | Beginning Equity + Net Income |
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| Average Equity | ₪948,663,765.5 | (Beginning Equity + Ending Equity) / 2 |
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| Dividend Payout Ratio | 0.00 | |
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| ROE (Return on Equity) | 52.48% | Net Income / Average Equity |
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| Sustainable Growth Rate | 52.48% | ROE * (1 - Dividend Payout Ratio) |
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| Actual Growth Rate | 71.16% | (Ending Equity - Beginning Equity) / Beginning Equity |
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- here beginning equity was based on 2019 Gross Profit
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- different beginning equity values lead to VASTLY different results
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- NOTE: you can see that the Sustainable Growth Rate, is very far bellow the Actual Growth Rate with 52.48% to 71.16%
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*** example where a dividend payout of 44% was expected
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| Column Name | Value | Formula |
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|---------------------------+----------------+-------------------------------------------------------|
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| Year | 2020 | |
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| Revenue | ₪1,399,440,000 | |
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| COGS (Cost of Goods Sold) | ₪279,888,000 | |
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| Gross Profit | ₪1,119,552,000 | Revenue - COGS (Cost of Goods Sold) |
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| Operating Expenses Total | ₪461,815,200 | |
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| Operating Profit (EBIT) | ₪657,736,800 | |
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| Interest | ₪85,000 | Given |
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| Tax | ₪159,764,269 | Assuming tax rate of 24.29% |
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| Net Income | ₪497,887,531 | Operating Profit - Interest - Tax |
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| Beginning Equity | ₪699,720,000 | |
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| Ending Equity | ₪1,197,607,531 | Beginning Equity + Net Income |
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| Average Equity | ₪948,663,765.5 | (Beginning Equity + Ending Equity) / 2 |
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| Dividend Payout Ratio | 0.40 | |
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| ROE (Return on Equity) | 52.48% | Net Income / Average Equity |
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| Sustainable Growth Rate | 31.49% | ROE * (1 - Dividend Payout Ratio) |
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| Actual Growth Rate | 71.16% | (Ending Equity - Beginning Equity) / Beginning Equity |
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- note the Sustainable Growth rate is worse at 31.49%
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- incidentally if I try to change the Beginning Equity to a different metric, ie such as revenue which is around 999m, the SGR becomes EVEN WORSE
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*** retained earnings
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- part of equity
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- how much profit derived over the years
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** playing with equations
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*** go through the following equations
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1. \[\text{ROE (return on equity)} = \frac{\text{net income}}{\text{equity}} \]
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2.
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\[\text{ROE (return on equity)} = \frac{\text{net income}}{\text{equity}} \times 1 \times 1 \]
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3.
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\[\text{ROE (return on equity)} = \frac{\text{net income}}{\text{equity}} \times \frac{\text{sales}}{\text{sales}} \times \frac{\text{assets}}{\text{assets}} \]
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4.
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\[\text{ROE (return on equity)} = \frac{\text{net income}}{\text{sales}} \times \frac{\text{sales}}{\text{assets}} \times \frac{\text{assets}}{\text{equity}} \]
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*** Lets break down this equation and define its parts
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**** first define ROE as Growth
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\[\text{Growth (ROE ie. return on equity)} = \frac{\text{net income}}{\text{sales}} \times \frac{\text{sales}}{\text{assets}} \times \frac{\text{assets}}{\text{equity}} \]
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**** now define the other parts of this equation
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1. Net Profit Margin is Net Income over Sales
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\[
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\text{Net Profit Margin} = \frac{\text{net income}}{\text{sales}}
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\]
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2. Asset Turnover is Sales over Assets
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\[
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\text{Asset Turnover} = \frac{\text{sales}}{\text{assets}}
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\]
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3. Equity Multiplier is Asset over Equity
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\[
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\text{Equity Multiplier} = \frac{\text{assets}}{\text{equity}}
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\]
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*** redefine the equation
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\[\text{Growth} = \text{Net Profit Margin} \times \text{Asset Turnover} \times \text{Equity Multiplier} \]
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by increaseing one of the three parts of the equation you can increase growth
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1. Net Profit Margin
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2. Asset Turnover
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3. Equity Multiplier
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