Aswath Damodaran – Laws of Valuation

Wednesday, January 9th, 2019

Great talk by Aswath Damodaran on the corporate life cycle and how companies evolve over time. Here is the video and some key takeaways:

Key Takeaways:

  • Companies don’t like to get old: fighting it can be one of the most dangerous things a business can do
  • Most value is destroyed by companies not acting their age
  • What makes for a great CEO of a company changes over the course of the life cycle
  • The progression of a company through this life-cycle:
  • The life cycle of a company is getting compressed: a 20-year old tech company is an old company
  • There are three main ways to make corporate finance decisions that maximise the value of a business:
    • The investment decision: Invest to earn a return greater than a hurdle rate
    • The financing decision: ensure the optimal mix of debt to minimise the hurdle rate
    • The dividend decision: if you cannot find investments that meet the minimum hurdle rate, then return cash back to shareholders
  • These decisions are heavily influenced by the life cycle: a start up would mainly be taking equity because it doesn’t have predictable cash flows, mature companies should think about financing mix as the cash balance start to build up and declining companies should be focusing on returning cash to shareholders
  • On Amazon as a disruption platform: it is unclear if Amazon will ever make money on any new business it enters but it is guaranteed that the existing players will lose money. 
  • Valuation is never just about the numbers; there is always a story that drives the numerical projections, especially for young companies. for mature companies, the numbers would drive the valuation more because you are at chapter 34 of a 35 chapter book and cash flows are predictable

About the author

Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.

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