CapitalatWork

The CapitalatWork Valuation Methodology is based upon sound principles of Investment Analysis, integrating the academic concepts of Present Value (PV) and the Capital Asset Pricing Model (CAPM). The intent of our work is to put a reasonable “Theoretical or Intrinsic Value” on the Equity of a company, and to compare it to its market price.

A company’s ultimate reason of existence is to create value for its shareholders.  To do so, it obtains financing or capital, basically through the issuance of equity and debt it employs in acquiring productive assets.  These assets are then supposed to generate a return that remunerates the capital employed.

Whether a company does this efficiently or not will ultimately determine its value. At CapitalatWork, we are searching for value by looking at a company‘s generation of “Free Cash Flow” (FCF) and by comparing it to the market value of the capital that is effectively employed to generate the FCF, “the Enterprise Value”. 

• Enterprise Value (EV)

  We distinguish 6 components in EV: Equity, Debt, Minority Interests, Other Liabilities relevant to EV, Cash, Other Assets relevant to EV. 

  Mathematically,
  EV = Eq + D + Min + OL – C – OA

• Free Cash Flow (FCF)

  FCF reflects the cash flow that is generated by a company’s operations and available to all the company’s providers of EV.

  We distinguish 4 components:
  1. EBITDA, or Earnings before Interest, Taxes, Depreciation and Amortization
  2. Taxes (T)
  3. going concern Capital Expenditures (Capex) includes recurring expansion capex
  4. The Change in Working Capital Requirement (Ch.WCR), or the change in non-financial current assets minus non-financial current liabilities

• Three Stage Model

  Stage 1 : We estimate 3 punctual FCF’s for the first 3 fiscal years: FY1 is the current fiscal year.  In the FCF Table on the previous page, below FYI, the end date of the current FY is mentioned
  Stage 2 : The following 5 years, we let FCF3 grow by a rate G1
  Stage 3 : From year 9 on, we let FCF’s grow by a rate G2

• Three Modules

  Expected Rate of Return: the return we expect when investing at the current stock price, taking into account our FCF and Gi estimates. WACC is the Weighted Average Cost of Capital, used in PV calcs.

  Fair Value: Requiring a certain return, taking into account both operational and financial risks, we calculate the Theoretical Value of equity.

  Implied Growth Rate: at what rate do our estimated FCF’s have to grow in order to justify the current stock price, and the required return.

• Crash Tests

  We process crash scenarios, in which all punctual FCF’s and G1 are lowered by 20%.

• Ratios

  Some straightforward ratios are displayed.  E.g. FCF yield is expressed in FCF/EV.
  Financial Gearing is expressed in NC+ ND- / Equity.  Herein, whatever the case, NC+ is Net Cash, and ND- is Net Debt.