RPC

What are the 3 financial statements

1. Balance Sheet

2. Income Statement

3. Statement of Changes In Equity

Income statement → Revenues & Expenses = Profit or Loss

Statement of Changes In Equity → Capital at beginning of the month & at the end (takes the profit or loss of the income statement)

Balance Sheet → Assets (left); Liabilities and Equity (from Statement of Changes in Equity) (right) → Left = Right

List some major line items on the Income Statement

• Revenues

• Operating expenses

• Profit or Loss

List some major line items on the Balance Sheet

• Assets (cash, supplies, equipment)

• Liabilities (accounts payable, notes payable)

• Equity (Owner capital)

List some major line items on the Cash Flow Statement.

• Cash flows from operating activities (cash received from clients, cash paid for supplies, cash paid for rent)

• Cash flows from investing activities

• Cash flows from financial activities (investment by owner, withdrawal from owner)

If I only had 1 statement to review the overall health of a company, which statement would I use and why?

Cash Flow Statement

• Shows how much cash a company is generating

  • Company can be profitable on paper (as shown in the income statement) but still fail due to poor cash flow management

• Insight into whether a company’s core business operations are producing positive cash flow.

• Shows how a company is managing its investments and financing

• Provides a clearer view of whether a company is generating real liquidity, which is crucial for assessing long-term sustainability and financial health.

What is Depreciation?

Process of allocating the costa of assets over their expected useful lives

What’s the formula for Enterprise Value?

Enterprise Value = Market Capitalization + Total Debt − Cash and Cash Equivalents

• Market Capitalization: This is the total market value of a company’s equity, calculated as the current share price multiplied by the number of outstanding shares.

• Total Debt: This includes all forms of debt, such as short-term debt and long-term debt, that the company has taken on.

• Cash and Cash Equivalents: These are the liquid assets a company holds, which are subtracted because they can be used to pay down debt, reducing the company’s net value to investors.

Could a company have a negative Equity Value?

No, a company cannot have a negative equity value in the context of market equity value. As long as the share price and number of shares are non-negative, the market equity value will always be non-negative.

Is Enterprise or Equity Value more representative of the value of a firm when valuing it?

• Equity Value represents just the value to equity investors (shareholders), and excludes debt. It’s important for determining the value per share of a company but doesn’t account for how much debt the company uses to finance its operations.

• Many key valuation multiples use Enterprise Value because they compare the firm’s total value to operational performance

What are the 3 major valuation methodologies?

1. Trading Comps/Comparable company: Look at comparable companies that are publicly traded and we can determine what other investors are willing to pay for that company. 

2. Precedent transactions: Where we can see an acquiring business pay for a business

3. Discount cash flow approach: Look at the company in isolation, don’t look at what other companies are worth, we forecast a business’s unlevered free cash flow into the future and discounts it back to today at the firm’s weighted average cost of capital 

Rank the 3 valuation methodologies from highest to lowest expected value.

It really dependants, sometimes:

1. Precedent transitions: Control premium (whereas trading comps don’t) -> Buyer paid a higher price to the seller to agree to the deal  (does not ALWAYSSS give the highest valuation)

2. DCF -> it can be anywhere (wild car) because it depends on your assumptions (if you have aggressive assumptions in your forecast -> high valuation)

3. Trading Comps -> Depends if its the buy or sell side; it gives the real time valuation the market is giving to the company (could be high if the market is trading at record high multiples)

So there isn’t one valuation methodology that always gives the highest value. It varies between companies

What are the most common multiples used in Valuation?

Equity value for shareholders: 

• Price to Earnings (P/E) = Market Capitalization/Net income

• Price to Book (P/B) = Market Capitalization/Book Value of Equity

  • Book Value = Assets - Liabilities

Enterprise value, includes shareholders and debtholders) -> Reflects the total value of the firm that both equity and debt holders have claims on

• EV-to-EBITDA = EV/Earning before interest, taxes, depreciation and amortization

  • EBITDA: Operational performance before accounting

• EV-to-EBIT = EV/Earnings before interest and taxes 

  • EBIT: Represents the company’s operating income

What are some flaws with public company comparables?

• No Perfect Comparables: Even if companies are in the same industry, they can differ in size, business model, product offerings, and geographic reach. 

• Market Conditions: The valuation multiples of comparable companies are influenced by the current state of the market. If the broader market is experiencing a boom and is overvalued, the multiples of the comparable companies will also be inflated, potentially leading to an overvaluation of the target company. Conversely, if the market is in a downturn and undervalued, the valuation may be too conservative. This reliance on market conditions can make it difficult to assess a company's true intrinsic value.

• Currency and Regional Differences: Companies that operate in different countries may be exposed to different currencies, economic conditions, regulatory environments, and market risks.

How do you select comparable companies / precedent transactions?

Goal is to ensure that you're comparing "apples to apples"—meaning that the companies or transactions chosen for comparison should be as similar as possible to the company being valued.

• Same industry

• Size (revenue)

• Geography region

• Growth rate 

• Profitability (EBITDA should be similar)

How would you value an apple tree?

• DCF

1. Project the future revenue the apple tree will generate from selling apples (number of apples per year * price per apple)

2. Estimate costs associated with maintaining the tree, harvesting, other operational expenses

3. Determine lifespan of a tree

4. Use discount rate to bring future cash flows back to present value 

   • Trading Comps

1. Determine earnings for the apple tree

2. Find comparable apple trees (size type, region) that are currently being traded/sold

3. Calculate P/E for comparable trees (market price of tree/annual profit of tree)

4. Value my tree by using average P/E ration from comparables 

   • Precedent transactions

1. Find similar apple tree transactions 

2. Analyze transaction multiples like Price-to-Production)

3. Adjust for market conditions (higher demand for apples?)

How do you take into account a company’s competitive advantage in a valuation?

A company with higher revenue growth, better margins and extended growth periods into my forecast -> Higher Cash flows

+

A strong competitive advantage reduces perceived risk allowing a lower discount rate because lower cost of equity, of debt and Weighted Average Cost of Capital (WACC)

=

Higher overall firm value

How would you invest 10M$?

• Real Estate (30% - $3 million)

• Stocks/Equities (40% - $4 million)

• Bonds and Fixed Income (10% - $1 million)

• Restaurants or Hospitality Ventures (10% - $1 million)

• Charitable Contributions (5% - $500,000)

• Alternative Investments (5% - $500,000)

What are some traits in a company that would make it a good investment?

• Strong and Growing Cash Flows

• Sustainable Competitive Advantage 

  • Brand Strength

  • Intellectual Property

  • Cost Leadership

  • Network Effects

• Strong Management Team

• Low Debt and Strong Balance Sheet (less vulnerable to interest rate changes and economic downturns) 

• Strong Liquidity

• Diversified Revenue Streams

• Attractive Valuation

• Strong Customer Relationships

Can you tell me about a specific company/industry you’ve been following?

Cannabis market

Would you recommend a company to issue debt or equity?

The decision to issue debt or equity strongly depends on the characteristics of the company, such as its size, growth stage, and financial health.

For a small startup -> equity financing:

• Uncertain Cash Flows (debt requires regular payments (both interest and principal), this could put significant pressure on the business)

• Flexibility (no mandatory payments)

• Equity investors often accept higher risk in exchange for the potential of high returns if the company succeeds while debt investors may be more hesitant to lend to startups due to the high risk and uncertainty of repayment

• Mentorship/connections
  

  When Startups Should Consider Debt Financing:

• If a startup has started to generate reliable, predictable revenues, it might consider taking on debt to avoid further dilution.

• If the startup has valuable assets (e.g., real estate, intellectual property), it might secure asset-backed loans that are less risky for lenders.