The Little Book of Valuation

Guide to making accurate business valuations based on investing metrics that matter

In The Little Book of Valuation: How to Value a Company, Pick a Stock, and Profit, professor and economist Aswath Damodaran guides readers through the fundamentals and step-by-step process of picking winning companies to invest in. In the book, you'll learn how to make your own accurate valuation assessments, avoiding common pitfalls and mistakes along the way.

From widespread misunderstandings to undeniable truths in valuation, the author covers exactly where to turn your attention to when assessing a company's value based on a myriad of factors, with stories and real examples included throughout to prepare you for any modern investing challenge you may find yourself facing. You'll also learn:

• Simple but extremely effective valuation tools and formulas for success
• The complex relationship between assets, debt, equity, and business value
• Special market considerations regarding valuation that require a dynamic approach

Rather than relying on third-party sources—often drawing from the same public information that you have access to, but getting it wrong—The Little Book of Valuation, Updated Edition gives readers all the insight and practical tools they need to cut through the noise and arrive at their own accurate valuations, pick profitable stocks, and establish successful long-term portfolios.

Foreword ix

Hit the Ground Running—Valuation Basics

Chapter One Value—More than a Number! 3

Chapter Two Power Tools of the Trade 15

Chapter Three Yes, Virginia, Every Asset Has an Intrinsic Value 43

Chapter Four It’s All Relative! 77

Chapter Five Stories and Numbers 105

From Cradle to Grave—Life Cycle and Valuation

Chapter Six Promise Aplenty 139

Chapter Seven Growing Pains 167

Chapter Eight Valuation Viagra 197

Chapter Nine Doomsday 219

Breaking the Mold—Special Situations in Valuation

Chapter Ten Bank on It 241

Chapter Eleven Roller Coaster Investing 267

Conclusion Rules for the Road 289

Aswath Damodaran, is a professor of finance and David Margolis teaching fellow at the Stern School of Business at New York University. He teaches the corporate finance and equity valuation courses at NYU, and he offers online versions on his website. He has written books on valuation, corporate finance and investments, directed primarily at practitioners.

In The Little Book of Valuation: How to Value a Company, Pick a Stock, and Profit, “Dean of Valuation” Professor Aswath Damodaran distills the fundamentals of valuation, without glossing over or ignoring key components, and develops models that investors can understand easily and use quickly with relatively few inputs to pick winning companies to invest in. In the process, he covers all of the different approaches to valuation—intrinsic or discounted cash flow valuation, multiples or relative valuation, and even some elements of real option valuation. Readers will not only be able to value a company quickly but will also be able to look at valuations done by others or equity research reports and discern whether or not they make sense.

The book explores value drivers for different categories of company and explains why each value driver is pertinent for each category. Categories covered include young growth, growth, mature, and declining companies, financial service firms, and intangible asset companies, with corresponding value drivers like revenue and scaling growth, equity risk, and nature of intangible assets.

Damodaran complements the book with uValue, an iPhone/iPad app that makes understanding stock valuations easy and intuitive. Readers can enter numbers relating to a company (or link up to a data service that will pull up the numbers) and get a quick estimate of its intrinsic and relative values.

Updated case studies and examples help investors build their own intuition and understanding of how to value stocks and companies.

The Little Book of Valuation: How to Value a Company, Pick a Stock, and Profit earns a well-deserved spot on the bookshelves of analysts, practitioners, and individual investors looking to develop a more nuanced and accurate approach to valuation and access simple but extremely effective valuation tools and formulas for success.

PRAISE FOR THE LITTLE BOOK OF VALUATION

“There is nothing ‘little’ about Damodaran’s The Little Book of Valuation. The whole gamut of ideas that form the basis for all business valuations—covered in his many multi-hundred page classics—are all here, with the same rigor, clarity, pointedness, and wit.”
—PROFESSOR ANANT K. SUNDARAM, Tuck School of Business, Dartmouth College

“The Little Book of Valuation is a great book that I will recommend to my students and friends. This book is an impressive synthesis of sound theory and best practice. It is completely accessible to the novice. It is also an important addition to the professional library of the finance specialist. Acquire it without hesitation.”
—PABLO FERNÁNDEZ, Professor of Finance, IESE Business School, Spain

“Damodaran’s fast read book offers valuable insights for both institutional and sophisticated individual investors. Within the confines of ‘intrinsic’ (income approach) and ‘relative’ (market approach) analysis, he identifies the ‘value drivers’ in several broad categories of stocks and the most important factors to look for, and how to treat them in valuation for each category.”
—SHANNON PRATT, Chairman and CEO, Shannon Pratt Valuations