Re:What is the valuation of my company?
by nostrademons on Tuesday June 19, 2007 @02:20PM
(#29266)
Uh, no. Discounted cash flow analysis is pretty much standard throughout the investment world. It's used to value just about everything, from startups to blue-chips to bonds to real estate.
You and PG are basically saying the same thing: NPV is the expected value of all future profits, discounted back to the present by the risk-free rate of return (normally taken to be the interest rate on T-bills). You're assuming that profits will remain constant, though. In most cases, this is not a valid assumption. Even big companies like Coca Cola have some earnings growth factored into their stock prices.
There is, of course, risk in trying to predict future profits. But there's also risk in assuming profits will remain constant (as I rudely found out when I invested in a stock with a P/E of 9, only to see it lose money the next quarter). That's why financial analysts get paid big bucks.
The only company that's worth zero is a bankrupt one. Sometimes not even then - many bankrupt companies still have a residual market cap because investors expect them to emerge from bankrupty and continue operating.
You and PG are basically saying the same thing: NPV is the expected value of all future profits, discounted back to the present by the risk-free rate of return (normally taken to be the interest rate on T-bills). You're assuming that profits will remain constant, though. In most cases, this is not a valid assumption. Even big companies like Coca Cola have some earnings growth factored into their stock prices.
There is, of course, risk in trying to predict future profits. But there's also risk in assuming profits will remain constant (as I rudely found out when I invested in a stock with a P/E of 9, only to see it lose money the next quarter). That's why financial analysts get paid big bucks.
The only company that's worth zero is a bankrupt one. Sometimes not even then - many bankrupt companies still have a residual market cap because investors expect them to emerge from bankrupty and continue operating.