Company Valuation

Every fair value on a PMC football field comes out of the same machine: a three-statement model that starts from a company's reported accounts and ends in a discounted stream of operating cash flows. This session — Learning Session 3 of Fall 2025, taught by a former Portfolio Manager, the VP of Asset Management, and the President — is the manual for that machine. It is the method behind the club's official valuation template, and the standard every DCF in a pitch is reviewed against.

The session has two halves that mirror how the work actually flows. First, reorganise what the company reports: reported statements are built for auditors, not for valuation, so the balance sheet, income statement, and cash flows get restated into an operating view. Second, forecast the restated statements through eight linked stages until the model closes — the balance sheet balances, and every line of the income statement and balance sheet ties to the cash flow statement.

The business planning framework

The framework — adapted from Bocconi's Corporate Valuation course — runs eight stages in a deliberate order. Each stage feeds the next; running them out of order is how models end up with circular references nobody can explain.

Sales: the forecast that carries the model

Because so much hangs on it, the total is never forecast as one number. The main decomposition is price times volume:

From there, two routes. Top-down: sales = market size × market share, with market size itself built from units and average sector prices. Bottom-up: sales = the sum of each business unit's price-times-volume build. Growth can be organic or external (M&A), and the forecast must respect physical constraints — floor space, production capacity — that a percentage growth rate will happily ignore.

Variable operating costs then follow a driver — % of sales or % of units sold — estimated from a historical average or a management/analyst target. The driver itself can evolve: held constant, improving with scale, or converging gradually toward a management target rather than jumping there in year one.

Investments: control accounts and days

Fixed assets are modelled with a control account — the same beginning-balance-plus-flows pattern that recurs throughout the model:

Capex is forecast as a % of sales or from management's stated targets by project, maintenance, and acquisitions. D&A is either a % of capex or a detailed schedule: depreciate each year's capex over a target useful life, keep amortising the existing asset base until expiry, and — by best practice — halve the first year's D&A on each capex vintage, since spend lands mid-year on average.

Net working capital runs on days-based drivers, using the club's 252-working-day convention:

Other items: the detective's hat

Exceptional P&L and one-off charges are forecast at zero, and surplus assets and non-operating liabilities are held constant. But the classification itself deserves suspicion:

Tax, equity, debt, cash — and the circle

Taxes are forecast either with the historical effective rate — income taxes over EBT — or from the country's actual code (Italy layers IRES at 24% on EBT with IRAP at 3.9% on roughly EBIT; the US layers state tax of about 7.5% with federal tax at 21% on EBT net of state taxes). Equity holds share capital constant, pays dividends as a payout ratio of net income, and rolls retained earnings forward — net income is the link from the income statement into the balance sheet. Debt is either modelled maturity by maturity or driven off a target leverage ratio like net debt to equity, which implies the net of new issues and repayments automatically.

The cash stage closes the loop: beginning cash plus the year's cash flow gives ending cash, and the cash flow of the year is the link from the cash flow statement into the balance sheet. One nuance — the revolver. If a year's cash flow drives the balance below zero, either the company has genuinely run out of cash, or the negative balance is functioning as a bank overdraft, which modelling treats as a revolving facility. Either way, interest income and interest expense must be modelled separately — the rate earned on average cash and the rate paid on average gross debt are different numbers.

Reorganising the statements

Why reorganise at all? Because financial accounting data enters the valuation at two load-bearing points — forecasting the cash flows, and moving from enterprise value to equity value — and the reported layout serves neither. The asset-side result the model discounts is the free cash flow from operations:

Two ground rules before touching anything: always base the analysis on consolidated financial statements — the ones where the whole company is represented — and neutralise accounting-standard differences across the peer set before comparing anyone to anyone.

The balance sheet: from A = L + E to CE = ND + E

The reported balance sheet sorts items by maturity: current versus non-current. The reorganised balance sheet sorts them by role: capital employed (what the business has cumulatively invested in its operations) financed by financing sources (who funded it). Items can be dragged within a side keeping their sign, or across sides by flipping it.

What actually sits inside non-cash working capital, in practice:

The definition is not set in stone — it may need flexibility per firm, occasionally pulling in non-current liabilities. The test is always operational nature, not maturity.

The income statement: down to EBITDA and below

The restated P&L runs Revenues → EBITDA → EBIT → EBT → Net income, with operating costs (excluding D&A) taken out first, then D&A (including impairments and fixed-asset write-offs), then net interest and exceptional items, then income taxes. One practical trap: income statements present costs by nature (personnel, raw materials, D&A — common in EU national GAAPs) or by function (COGS, SG&A — common under IFRS and US GAAP). In the by-function case, D&A is buried inside the functional lines; you need to find the D&A breakdown in the company's report and adjust the income statement accordingly, or your EBITDA is fiction.

The cash flows: FCFO to FCFE, until it balances

The rebuilt cash flow statement is a reconciliation that starts at EBIT and cascades down:

Three definitions make the top line work. Operational taxes are the taxes that would have been paid on EBIT alone: EBIT × effective tax rate. The tax shield is the savings generated by everything below EBIT — actual income taxes minus operational taxes. And NOPLAT — EBIT minus operating taxes — is the measure of operational performance generated by capital employed. The final discipline: check that every item in the income statement and balance sheet is linked, directly or indirectly, to the cash flow statement.

The model, end to end

Zoomed out, the model's logic is a directed graph. Annual reports feed the as-reported historicals; those get restated; the restated historicals plus external sources feed the assumptions and drivers; the drivers fan out into the working tabs — sales and OPEX, capex and D&A, NWC, debt and interest, equity, and other items — and the tabs converge into three output statements. The output income statement passes net income into the output balance sheet; the output cash flow statement passes cash into the balance sheet; and the closing identity holds:

From enterprise value to equity value

The present value of FCFO gives the market value of capital employed — enterprise value. But a pitch recommends a share price, and getting there is the equity bridge, implied by the other reorganised balance-sheet items — which is why a carefully reorganised balance sheet is paramount:

Whether a stake shows up inside EV or in the bridge depends on consolidation:

Full consolidation pulls 100% of a subsidiary's revenues and costs into the group P&L and gives the outside shareholders their share back through the minority-interest line; the equity method leaves an associate out of operations entirely and books the owned share of its net result as a single line. That is exactly why associates are added and NCI is deducted in the bridge.

Where to go deeper

The session's single outside recommendation is Professor Aswath Damodaran — the "Dean of Valuation." His NYU courses on corporate valuation, corporate finance, and statistics are free on his YouTube channel, and he maintains an online database of market data, projections, and auxiliary valuation inputs the club draws on. For anything else, the standing instruction is simpler: ask. Reach out to the presenters or to anyone in the club.