The Financial Analysis of a Corporation

27/09

Part 2 - Valuation

Valuation need a very deep analysis of the company, of the sector and the estimation of the future (cash flows and financial assets). Starting by the financial analysis, we’re going to put criteria in our analysis for cash flows and DCF. Then we’re going to talk about Relative Valuation, not more than a Discounted CF Valuation with some other assumptions.

1. The Financial Analysis of a Corporation

Financial Analysis is important for investors, we’re talking about someone that buy shares or stocks or even the all business: this analysis will help to valuate a firm. (As always firms want to maximize their value, so if we buy a business that is creating value for a 10% and this creation of value doesn’t increase but remains at 10%, we are just managing a creation of value that someone else have done.)

Financial Analysis is important to determinate the capacity of the company to create value in the past or estimate its capacity to continue creating value in the future. It’s constrained by available information about the company, its quality and its periodicity.

We can also benefit of listed company because every day we can see the share price with markets informationally efficient (assumption or not) and use capitalizations of equity and debt as basis for the valuation. So, we limit our analysis at the return of shareholders because all the other stakeholders are protected.

The Financial Analysis is divided in five phases:

• Analysis of the performance of market price of company shares;
• DuPont analysis;
• Cash-flow analysis;
• Financial risk analysis;
• Company valuation.

1.1 Market Price Analysis

All the analysis requires a critical evaluation of the degree of efficiency of the actual market: shares are traded every day, but this analysis is simple only if the company has a lot of shares and trade are made every day. We need something informative as a representation of the past of the company.

We need also to considerate:

• The dispersion of share capital, with several people that are shareholders without intention of selling (like a big part of the shares) and the other shares are not concentrated in the hand of an only person.

We talk about free-float: share that are not in the hands of strategic investors so they can be always traded, all the time. As higher is the free-flot as higher is the dispersion of shares. If you look at the main shareholders, knowing for example that they have the 30% for a long period of time, we can suppose that free-flot is at 70%.