Life Cycles of
Companies...Mature Companies (Large Caps) Two
Operating Restructuring
When valuing a company, our forecasts of earnings and cash flows are built on assumptions about how the company will be run. The value of the operating assets of the firm is a function of three variables - cash flows from assets in place, expected growth, and the length of the growth period - and each can be altered by management policies.
Cash flow from existing assets: If existing investments are being operated inefficiently, cutting costs and improving employee productivity or redeploying assets to new uses can increase cash flows.
Expected growth rate: Firms can increase their long-term growth by either reinvesting more (higher reinvestment rate) or reinvesting better (higher return on capital). They can also improve returns on existing assets to generate short term growth. For mature firms with low returns on capital (especially when returns are less than the cost of capital), extracting more growth from existing assets is likely to yield results, at least in the short term.
Length of the high growth period: The longer a firm can maintain high growth and excess returns, the higher will be its value. One way firms can increase value is by augmenting existing barriers to entry and coming up with new competitive advantages.
to be continued...
Resources
The Little Book of Valuation
Aswath Damodaran
Operating Restructuring
When valuing a company, our forecasts of earnings and cash flows are built on assumptions about how the company will be run. The value of the operating assets of the firm is a function of three variables - cash flows from assets in place, expected growth, and the length of the growth period - and each can be altered by management policies.
Cash flow from existing assets: If existing investments are being operated inefficiently, cutting costs and improving employee productivity or redeploying assets to new uses can increase cash flows.
Expected growth rate: Firms can increase their long-term growth by either reinvesting more (higher reinvestment rate) or reinvesting better (higher return on capital). They can also improve returns on existing assets to generate short term growth. For mature firms with low returns on capital (especially when returns are less than the cost of capital), extracting more growth from existing assets is likely to yield results, at least in the short term.
Length of the high growth period: The longer a firm can maintain high growth and excess returns, the higher will be its value. One way firms can increase value is by augmenting existing barriers to entry and coming up with new competitive advantages.
to be continued...
Resources
The Little Book of Valuation
Aswath Damodaran
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