Caveat Emptor: Business Valuation in a 21st-Century Economy—VentureCapital.org

Past Performance is No Longer a Viable Valuation Tactic: Learn to Anticipate Future Prospects with Data Mining, Proprietary Benchmark Techniques, and a Close Look at Both Cash Flow and Capital Expenditures.   

Caleb Slabbert, writing at VentureCapital.org, which bills itself as a non-profit organization that has been “a premier resource for both entrepreneurs seeking funding and for investors who want to help promising young companies achieve their potential,”  asserted this week (3/26/13) that past performance of a company is no longer a viable valuation tactic.   What matters?   Newer techniques that many firms aren’t taking advantage of:  

Investment gurus are quick to point out that traditional business valuation tactics, which have historically relied on P/E ratios as their foundation, are becoming less relevant in an increasingly global corporate landscape, and that a balanced valuation methodology is one that incorporates both P/S and P/E ratios in addition to free cash flow analytics.

To be competitive, many business valuation services in the technology and industrial sectors use a combination of data mining and proprietary corporate benchmark techniques.  Successful corporate valuation requires a sophisticated understanding of cash flow and capital expenditures.  There’s a lot more to interpreting a balance sheet than simple math, and accurate valuation in the modern market has to be informed by a comprehensive understanding of revenue-based valuations.

High-growth sectors, like the biotech and electronics industries, are especially prone to misvaluation, and need to be looked at through a price/sales lens.  Corporations which have failed to produce a profit in the last year are not, after all, necessarily a bad investment, and companies in the high-growth sector may lose money for several quarters before they’re widely acknowledged as value companies.

Read the whole piece here. 

Focus Valuations on Likely Future Performance.  Here’s How.