Valuation Checklist

  1. Five years of historical financial statements from which a track record and trends can be established.
  2. Using the historical I/S and B/S, calculate descriptive statistics, mostly as a percentage of sales. These are used to forecast the future I/S and B/S. Science only.
  3. Forecast sales growth and operating margins ten years into the future…art is needed here!
  4. Using items 2 and 3, determine the future income statements and balance sheets.
  5. Calculate the future free cash flow (FCF) from the forecasted financial statements.
  6. Calculate an appropriate cost of capital (WACC). For an unlisted business in South Africa, 20% is a good number.
  7. Determine a terminal growth rate. This is a growth rate for the years beyond the forecast. Typically the sales growth rate used in year 10 of the forecast can be used here. 5% — 7% is not unusual (this part is all art).
  8. Calculate the terminal value. This value of the cash flows for years 11 and onwards.
  9. Discount the future cash flows and the terminal value to get a time and risk-adjusted present value. This is called the Enterprise value.
  10. From the Enterprise value, subtract the outstanding debt and add the cash to get the Equity value.
  11. Divide the Equity value by the number of issued shares to get the notional share price.
  • FCF = Ebit + Interest income — Tax — change in working capital (net of cash and overdraft) — CAPEX
  • WACC = (Cost of Equity x Equity%) + (Cost of Debt x Debt%) *mostly relevant for listed companies. See point 4 above for unlisted companies
  • Terminal value formula = (FCF Yr10 x (1+ terminal growth rate)) / (WACC — terminal growth rate)
  • Present value formula = FCF / (1 + WACC) ^ YearsEnterprise value = PV of future cashflows + PV of the terminal value
  • Equity Value = Enterprise value — Debt + Cash
  • Share price = Equity value / number of issued shares



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Justin Spencer-Young

Justin Spencer-Young


Daily content creator at Fast Forward Business. Chief Valueologist. Fast Forward Business Podcast…look out for my daily podcast…a shot of value in your day