What do my financial estimates say about this company? What does it mean to have
ID: 2631533 • Letter: W
Question
What do my financial estimates say about this company? What does it mean to have a negative equity value? I noticed when I put a higher short-term growth rate and a lower long-term growth rate, my equity value became positive and so did all the other negative numbers in the valuation.
Free cash flow year ending 31 Dec.2013 5,025 Short-term FCF growth rate 7.00% Long-term FCF growth rate 12.00% WACC 35.26% Year 2013 2014 2015 2016 2017 2018 FCF 5,025 5,377 5,753 6,156 6,587 7,048 Terminal Value (120,439) (128,870) (137,891) (147,543) (157,871) Total (115,062) (123,117) (131,735) (140,956) (150,823) Enterprise value (326,833) Initial cash and marketable securities 1,339 2013 financial liabilities 123,727 Equity Value (449,221) Per share (1.6B oustanding) (0.00)
Explanation / Answer
The Cash Flow indicates that the company is declining company and it may face uncertainty in future as it shows some of the following symptoms.
1. Stagnant or declining revenues: Perhaps the most telling sign of a company in decline is the inability to increase revenues over extended periods, even when times are good. Flat revenues or revenues that grow at less than the inflation rate is an indicator of operating weakness. It is even more telling if these patterns in revenues apply not only to the company being analyzed but to the overall sector, thus eliminating the explanation that the revenue weakness is due to poor management (and can thus be fixed by bringing in a new management team).
2. Shrinking or negative margins: The stagnant revenues at declining firms are often accompanied by shrinking operating margins, partly because firms are losing pricing power and partly because they are dropping prices to keep revenues from falling further. This combination results in deteriorating or negative operating income at these firms, with occasional spurts in profits generated by asset sales or one time profits.
3. Asset divestitures: If one of the features of a declining firm is that existing assets are sometimes worth more to others, who intend to put them to different and better uses, it stands to reason that asset divestitures will be more frequent at declining firms than at firms earlier in the life cycle. If the declining firm has substantial debt obligations, the need to divest will become stronger, driven by the desire to avoid default or to pay down debt.
4. Big payouts
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