This group is dedicated to business valuation professionals and includes discussions on various topics related to business valuation. Recent discussions include comments on an article about flaws in using price to earnings ratios to measure value, with members agreeing the accounting earnings used can be unreliable. Other discussions focus on returns on invested capital being an important metric, the difference between stock pricing and business value, and the importance of entity-specific risks to management versus market risks.

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Garry Horsnell Nice article, definitely agree with some of the points regarding flaws in the
derivation of value.
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Carl Sheeler, Ph.D., ASA, CBA, CVA Always there needs to be context. As an example,
if an enterprise has low earnings, the P/E multiple may be ridiculously high. While not a big
fan of EBITDA one may be able to get a sense of leverage and return by... Show more
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Louis Dreon II, CPA, CFA Nice article and definitely agree. Basics concept of earning
ROIC > WACC goes back to fundamental "Capital Budgeting" analysis.
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Tirthankar Talukdar ROIC is indeed an important metric to consider which most intelligent
investors miss out on..nice article!!
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Sukarnen Suwanto I guess as the financial markets nowadays have become so active
and liquid, it brings with it, inevitably, a misleading understanding about business “value”
definition. In fact, what happens there is just “pricing”. Pricing and value are two different
things. Financial markets are about supply or demands of goods/services. We are talking
about emotion, greed, error, noise etc. being mixed up the formation of the security prices
(even we can call it, people trades on information). As financial markets are some kinds of
investment, then so far, it involves risk, the logic doesn’t always work very well. As Amos
Tversky and Daniel Kahneman had argued, back in 1979, the decision makers in the real
world did not follow the statistical models, but used simple heuristics, known familiar “rules
of thumb”. In addition, financial markets are now not just markets for a company’s stocks,
but to the whole companies. Show less
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Sukarnen Suwanto The ability of the company management to reinvest the “cash” profit
the business generated at the return higher than its cost of capital, over a sustained period
of time, is quite critical, to the business value. At the end, we could see that business value
will come along with the cash profit that the company could distribute to the shareholders,
or reinvested sensibly. Show less
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Sukarnen Suwanto I concur with Carl’s comments in his last sentence. Additionally,
though CAPM says to ignore the specific risks of the company in coming up with the
company’s cost of equity, per my experience, it is the entity­specific risks that the
management are really concerned about. That is how well, the business will perform on
average and over time. The market risks are and will always be there either economy in
general is up or down following the cycle or even if there is a fundamental shift in the
economic structure. To management, what matters, is the strength of the business to
weather the usual and unusual unpredictable events. Market share, product quality, product
acceptance, brand awareness, human capital, distribution networks, supply chain, market
penetration, etc. etc are all that matters, if the company wants to stay in the market for a
long time. Yet the market brings, however, valuable information. Show less
1d
Sukarnen Suwanto Over the long­term period of time, the company’s stock performance,
relative to the rest of the industry and the market as a whole, will tell us about management
performance. In this point, the distance between shareholder values and business values
Chris Hamilton
Business and Intangible Asset Valuations, Forensic Accounting, Fra…
Are P/E Ratios a Poor Measure of Value?
We’ve pointed out the flaws in the price to earnings (PE) ratio many times before. Chief among
these flaws is the fact that the accounting earnings used in the ratio are unreliable for many
reasons: Accounting rules can change, shifting reported...
Here's Why P/E Ratios Are A Poor Way To Measure
Value
We’ve pointed out the flaws in the price to earnings (PE) ratio
many times before. Chief among these flaws is the fact that the…
accounting earnings used in the ratio are unreliable for many
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2. will shrink off.
Short­term volatility in the market should be ignored. It is the volatility of the business that
should be able to wake the management up in the middle of the night. I don't believe the
institutional investors can know the company business more than the management does
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1d
Carl Sheeler, Ph.D., ASA, CBA, CVA Hi, folks. You may find the following of interest.
http://finance.yahoo.com/news/dr­carl­sheeler­cracks­elusive­133500920.html
Let's celebrate! Share with you closest million friends!
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