Placing a Value on a

Company: Predictability

of Performance of a of Performance of a

Company

� When you apply for a bank loan, the loan officer at

the bank wants your last three paycheck stubs or

your income tax returns for the past two years.

Predictability of Performance of a Company

� They want to be able

to project how much

income you will income you will

generate based on

your past

performance.

� If you have been in and out of work for the past two

years, then a bank will not be able to accurately

predict your future earning, because you are

inconsistent. Therefore, you are a financial risk.

� Similarly, a business is a start-up, you cannot

reasonably predict its future performance, which

Predictability of Performance of a Company

reasonably predict its future performance, which

makes it a financial risk.

� Predictability of Performance of a Company

involves evaluating how the company has done over

the past five or more years. When evaluating the

performance of a company, you are looking for

trends:

Predictability of Performance of a Company

• Are the company’s sales steadily • Are the company’s sales steadily

increasing year after year?

• Or are sales on the decline?

• Are they showing steady improvement

in profit year after year?

• Are sales up and down, no

consistency?

� After you identify these trends then you need to be

able to quantify the increases or decreases.

Predictability of Performance of a Company, cont’d

Example of a trend:Example of a trend:

Starbucks has a steady increase in net profit over

the last 5 years. I then find out what the percent

increases are between each year and come up with

an average increase of 5%. Now, I can reasonably

predict that the net profit for next year will be a 5%

increase, at least.