At such times of uncertainty, and the fragility of one’s point of view about the virus impact on economies and industries, valuations are exceptionally challenging. Sticking to the basics of fundamentals is an extremely important, disciplined approach to the company valuation. Thats why the Valuation at the time of the epidemic is different.
Valuation is an art
Valuation is an art, professor Damodaran once said. Indeed, finding the intrinsic value of the business is an art. It is equally important for business owners and investors to know the true value in the proposed project and understand its drivers. Valuations have been relying on past performance – Pre-crisis historical financial data – and future assumptions.
At the time of crisis, the gap between past performance and future performance has been widening, hence, putting the valuation method in question under review. It is healthier and wiser not always to assume past performance will repeat itself in the future. However, ones can not ignore them (historical data). Moreover, the model assumptions are embedded with such uncertain predictions, specifically for a longer time frame valuation. The impact of the epidemic on economies requires a deeper digging to understand which industries are most negatively affected and the ones that are positively affected and the contribution of each to the total GDP.
“It is precisely times like these that matter most, You need to go back to the first principles of valuation. Everything I have learned about valuation has been in the context of a crisis,” said Prof. Aswath Damodaran at the CFA institute annual virtual conference.
Sticking to principles and put it in the context of a crisis as Prof. Damodaran put it. Thankfully, he did putt for us some adjustments framework to the discounted cash flow method,
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