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How to value a company

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By Michael O’Connor, theislandinvestor.com

Every company valuation is simply numbers from today multiplied by a story about tomorrow.

You have financial statements that give you an insight into how the company is performing at a specific moment in time, but it will be the future growth projections from management and market analysts that ultimately determine the price.

Take Tesla, for instance. Revenue and cash flows provided insight into the company’s performance, but it was predictions about future automated driving capabilities, battery production capacity and a world pivoting towards electronic vehicles that drove the company to its trillion-dollar valuation. Today, the revenue and cash flows are better than they have ever been, but the story about tomorrow has faded, and the company is down almost 60%.

While the numbers from today can be quantified, the story is driven by the future growth possibilities of the company. These future growth possibilities can seem rational at any one moment, but as the economy and company performance change, so do the growth possibilities.

Be careful how much weight you put on the stories the market is telling you about specific companies. As the information changes, so too will the story.

To quote Morgan Housel

“We can use historical data to assume a trend will continue, but that’s just a story we want to believe in a world where things change all the time”

Valuation tips

When valuing a company, you need to listen to the story being told by the company’s management team and assess whether this story is economically viable.

Here are three areas to focus on and some questions you should always ask yourself when valuing a company.

Current Cashflows

Is the company generating the profits needed to fund future business? Are the gross and net margins of the company competitive? How stable has the revenue generation been over time? Has the ROE from management been competitive?

Growth Potential

What has the revenue and earnings growth rate been over time? Are there potential revenue streams not currently being accounted for? Does the company have operating leverage that will help drive future profit margins? Does the company have a durable competitive advantage?

Future Risk

Who are the major competitors in the space, and does the company have an established moat to protect its market share? At what point will the company saturate the market, inhibiting future growth? Is the story currently being told by management viable if economic conditions changes?

Stock Picking is Hard

Since the 1940s, the phenomenal return of the S&P 500 has been generated by just 7% of the companies within the index. That is to say, 93% of the companies that made up the index reported flat or negative returns over time.

Remember, while the stock market has historically provided positive returns, picking individual names remains a difficult feat, with the odds very much stacked against you.

For those who get it right, financial elation awaits. But beware, information is constantly changing, so the probability of success can be lower than you think, no matter how strongly you believe in the future story you tell yourself.

If you have any investing questions, scan the QR code above and reach out. Always happy to help.

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Credit Union launch a new collaboration with Gilroy’s Green Energy Ltd.

Building on recent success the Credit Unions of Kerry and West Limerick have launched a new collaboration with Gilroy’s Green Energy Ltd. Gilroy’s Green Energy Ltd specialise in Photovoltaic (PV) […]

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Building on recent success the Credit Unions of Kerry and West Limerick have launched a new collaboration with Gilroy’s Green Energy Ltd.

Gilroy’s Green Energy Ltd specialise in Photovoltaic (PV) Solar systems that generate electricity, battery storage, air to water heat-pumps and much more.
Gilroy’s work with customers to receive the SEAI once-off grant towards the purchase and installation of solar photovoltaic (PV) systems and heat pumps for your home.
Collaborating with Kerry and West Limerick Credit Union expands the finance options available to Gilroy’s Green Energy Ltd customers to help finance new PV Solar Panel installations. Loan rates will be directly linked to the property BER starting from 4.7%(4.89APR) for an “A” rated BER.
Martin Gilroy; CEO with Gilroy’s Green Energy Ltd said: “We are delighted to officially launch this collaboration with the Credit Unions of Kerry and West Limerick. Customers have already reaped the benefits on recent installation projects after contacting their local Credit Union. Having a direct link to local Credit Unions allows us to guide customers to affordable financing options based on the specific installation quotation we provide at very competitive rates.“
Speaking on behalf of the Kerry and West Limerick Credit Unions, Ashley Fitzgerald added: “We are delighted to have Gilroy’s Green Energy Ltd come on board as part of our Greener Homes Loan offering. Home Energy Upgrade have become a prominent concern and talking point among members in recent months, by Credit Unions having a direct link with Gilroy’s Green Energy Ltd allows both sides to make referrals and seek the best finance option for members. We are working hard building relationships with Green Energy Ltd providers as we want to ensure our members can avail of the best loan rates for all upgrade works.”
Credit Unions across Kerry and West Limerick. Abbeyfeale Credit Union, Cara Credit Union, Killarney Credit Union, Listowel Credit Union and Rathmore and District Credit Union can be reached via: www.creditunion.ie
Gilroy’s Green Energy Ltd can be contacted on 066-7115920, email info@gilroys.ie or for more information visit www.gilroys.ie.

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Racegoers Club to host Cheltenham Preview Night

Killarney Racegoers Club will host its annual Cheltenham Preview Night in Corkery’s Bar on March 7. Admission is free and this year’s chosen beneficiary is the Killarney Branch of St […]

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Killarney Racegoers Club will host its annual Cheltenham Preview Night in Corkery’s Bar on March 7.

Admission is free and this year’s chosen beneficiary is the Killarney Branch of St Vincent De Paul Society.
The expert panel includes professional punter Paddy Wilmott, leading jockey Conor McNamara, up-and-coming Kerry-based trainer Eoin McCarthy and local bookmaker Brendan Tyther with Vince Casey acting as the event’s compere.

“There is no admission fee but a raffle on the night for dual membership of Killarney Racegoers Club for the year, which includes 13 days racing and many reciprocal days to other race meetings,” said Mr Casey.

The Cheltenham Festival begins on March 12.

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