The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit (Little Books. Big Profits)

by Aswath Damodaran

Growth companies are diverse in size and growth prospects, but they share some common characteristics: Dynamic financials: Not only can the earnings and book value numbers for the latest year be very different from numbers in the prior year, but they can change dramatically even over shorter time periods. Size disconnect: The market values of growth companies, if they are publicly traded, are often much higher than the book values, since markets incorporate the value of growth assets and accountants do not. In addition, the market values can seem discordant with the operating numbers for the firm—revenues and earnings. Many growth firms have market values in the billions, while reporting small revenues and negative earnings. Use of debt: Growth firms in any business will tend to carry less debt, relative to their value (intrinsic or market), than more stable firms in the same business, simply because they do not have the cash flows from existing assets to support more debt. Market history is short and unstable: Even if growth companies are publicly traded, they generally have stock price data going back for only short periods, and even that data is unstable. While the degree to which these factors affect growth firms can vary across firms, they are prevalent in almost every growth firm.