An alternative way to look at valuation
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All formal education on security valuation talks about discounted cash flow (DCF) valuation. All of them will also mention relative valuation - although they will not necessarily hold them up in the same high regard as DCF valuation. Rightly so. Relative valuations are basically shorthand rules that apparently substitute for DCF. However, there is one other way to break down the valuation question. That is to break down valuation into a steady-state value and future value creation. This is also an extremely intuitive way to look at it. And in some ways, it segregates and highlights the important concerns around valuation into clean components. Here's the equation.
$total\, value = steady\, state\, value + future\, value\, creation$
The steady-state value can be thought of as the value of the business if it continues to generate the same steady earnings as it does today. To this, we add the value of any excess cash that the business has.
$steady\, state\, value = \dfrac{net\, operating\, profit\, after\, tax}{cost\, of\, capital} + excess\, cash$ Further, we say that future value creation is a function of three things:
The excess return earned over the cost of capital during this growth
The durability of these excess returns
Ability to invest and grow at this excess rate of return
Thus. We write future value creation as: $future\, value\, creation = \dfrac{investment \times (rate\, of\, return - cost\, of\, capital) \times durability}{(cost of capital \times (1 + cost\, of\, capital))}$
Immediately it becomes evident that growth is useful only if the business earns a return in excess of the cost of capital. Now, this excess rate of return can be thought of as a function of the business' moat. And the durability factor is the durability of the moat. In this way, the value of a moat is revealed quite plainly.
Similarly, the ability to invest reflects the total addressable market. Again, it becomes evident that the total addressable market is not necessarily all possible buyers of a business' products or services. It is the set of customers which the company can possibly supply while maintaining excess returns. Everything in excess of that is pointless.
To my mind, this formulation of the valuation problem opens up the perfect gateway to begin exploring everything from management strategy, industry structures, market sizes etc in a systematic way. Every area that we examine then relates back directly into the valuation framework. Unlike the DCF framework (no doubt very useful too), this formulation has the benefit of directly embodying the real-world practice of running a business. There is an incredible amount of nuance within this, but its a fantastic starting point.
Reference: What Does A Price-Earnings Multiple Mean? - Mauboussin and Callahan