Capital Markets / Investor Relations in Two Minutes or Less
Valuation Considerations – Part 1
Price is what you pay and value is what you get.
A famous maxim from Charlie Munger and Warren Buffett.
The fact that basis or purchase price is permanent makes valuation work important.
When considering valuation of a stock, there are two primary variables, among others.
Two Primary Variables of Valuation
1. Time Frame / Horizon
2. Valuation Metrics
Four Time Periods to Consider
1. LTM = Latest Twelve Months
2. NTM = Next Twelve Months
3. FY+1 = Next fiscal year
4. FY+2 = Two Fiscal Years Out
Let us look at a timeline to illustrate these time frames.
Consider a baseline of April 2024, which for a public company means valuation input data ending on 12/31/2023.
1. LTM or TTM = January to December 2023
2. NTM or Current Year = January to December 2024
3. FY + 1 = January to December 2025 = Sweet Spot for Most!
4. FY + 2 = January to December 2026
Different industries will focus on different time frames.
Technology like SaaS or Internet will focus on FY + 1 or FY + 2 to drive valuation calculations.
Industries like Healthcare IT or Industrials or commodities focused may look at the NTM valuation time frame.
Why Do Forward Multiples Matter?
Forward multiplies give the investor an idea of what issues or catalysts the market is already discounting in the current valuation, or completely overlooking.
Growth oriented investors are looking to value what will happen in the future versus today or in the past.
Third selecting the wrong time frame / horizon can lead to mixed or disastrous results.
A stock might look expensive on a current year basis, but extremely cheap on an FY+2 basis.
The worst case for an investor revolves around identifying an overvalued or undervalued stock on a given time frame, only to find out that the conclusion was a false positive.
What Do Forward Multiples Tell Executives?
Forward multiples provide insight into what investors may or may not understand or believe about your company and stock thesis.
An executive, especially an IRO, should be able to identify valuation disconnects in the stock and help resolve the key investor debates driving said disconnects.
Key Learnings
1. Two variables of valuation: time frame and metric
2. Four time periods to consider
3. Forward Multiples Matter
4. Forward Multiples can Identify Valuation Disconnects
5. Consensus Valuation Methods Matter!
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