Qualitative Analysis for Corporate Valuations

Sarah Martin

30 years: Corporate Valuations

In this video, Sarah Martin explores the crucial qualitative factors that underpin robust corporate valuations, often overlooked despite their significant impact. She explains how to conduct a top-down qualitative analysis, beginning with sovereign and macroeconomic risks, then moving to sector-specific risks, and finally, firm-specific business risks, all of which directly influence a firm's risk profile, growth outlook, and WACC.

M&A

Subscribe to watch

Access this and all of the content on our platform by signing up for a 7-day free trial.

Qualitative Analysis for Corporate Valuations

15 mins 30 secs

Key learning objectives:

Understand the importance of qualitative analysis in corporate valuations
Identify the three key areas of qualitative analysis
Identify how sovereign and sector factors influence a firm's risk profile and growth prospects
Understand the various firm-specific factors to consider

Overview:

Robust corporate valuations require a thorough qualitative analysis to account for subjective factors that significantly influence a firm's risk and growth outlook. This top-down approach begins with sovereign and macroeconomic considerations, which can profoundly impact a firm's borrowing costs and long-term prospects. Next, sector or industry risks are assessed, as even well-managed firms struggle in deteriorating sectors. Finally, a detailed firm-specific analysis covers aspects like operational efficiency, strategic direction, financial policies, the quality of management and corporate governance, and ownership structures, all of which are crucial for a defensible valuation.

Subscribe to watch

Access this and all of the content on our platform by signing up for a 7-day free trial.

Summary

What is qualitative analysis in corporate valuations?

Qualitative analysis in corporate valuations, sometimes called "business risk analysis," involves assessing subjective factors that are crucial for a robust and defensible valuation. It complements quantitative analysis by providing context for forecasts of earnings, cashflows, and the Weighted Average Cost of Capital (WACC).

What are the three key areas of qualitative analysis?

Qualitative analysis is typically divided into three key areas:

Sovereign and macro risk: Factors related to the countries in which the firm operates, such as economic growth, borrowing costs, and political stability
Sector or industry risk: Factors specific to the industry the firm operates in, including demand trends, regulation, competition, and capital intensity
Firm-specific risk: Factors unique to the individual firm, such as its operations, strategy, financial policy, management, corporate governance, and ownership structure

Why is a top-down approach recommended for qualitative analysis?

A top-down approach, starting with sovereign/macro analysis, then sector, and finally firm-specific, is recommended because a firm's risk profile and growth outlook are heavily influenced by the countries and sectors in which it operates. Even a strong firm struggles to overcome significant sovereign or sector-wide challenges.

How does sovereign and macro risk analysis impact a firm's valuation?

Sovereign and macro risk analysis directly impacts a firm's valuation by influencing its risk rate, growth outlook, and borrowing costs (which feed into WACC). Firms operating in weak economies with high borrowing costs or political instability are unlikely to prosper and will typically have lower, more volatile valuations. Key variables to consider include GDP growth, investment levels, government debt, and sovereign credit ratings/CDS spreads.

What aspects are covered in sector or industry business risk analysis?

Sector or industry risk analysis examines how the broader industry environment affects a firm. It typically analyses risks, mitigating factors, opportunities, and changes in key metrics such as growth, regulation, government policies, competition, cost base, profitability, and capital intensity. It also considers the impact of climate change, new technology, changing consumer preferences, demographics, and M&A dynamics within the sector.

What factors are assessed in firm-specific business risk analysis?

Firm-specific risk analysis delves into the firm itself. It covers various components:

Operations: Factors like scale, cost efficiency, distribution network, customer base, geographical/product/customer concentration, climate change adaptation, regulation, and competitive advantages (e.g., brand names). For some sectors, innovation and marketing skills are also crucial
Strategy: The group's stated strategy for investments (new assets, markets, acquisitions), M&A activity, disposals, and restructuring under-performing operations
Financial Policy: The firm's approach to leverage, hedging financial risks (interest rates, currencies, commodities), dividend and share buyback policies, use of hybrid debt, and managing investor relationships
Management and Corporate Governance: The quality and track record of board members, succession plans, mechanisms for replacing under-performing members, and compliance with corporate governance codes
Ownership: The impact of different ownership structures (private, publicly listed, state-owned) on the firm's strength, capital raising, and potential for excessive distributions or adverse M&A

Subscribe to watch

Access this and all of the content on our platform by signing up for a 7-day free trial.

Sarah Martin

Sarah Martin has a degree in economics from the London School of Economics and stock exchange and regulatory qualifications from London and New York. She has worked in investment banking for 17 years, as well as private equity transactions and as an expert witness in financial trials. She became a financial trainer 15 years ago and specialises in credit, distressed debt, and valuation. Recent assignments have included the European Central Bank, the European Investment Bank, the EBRD, Gibbs Business School in Johannesburg, the Bahrain Institute of Business Finance, the Bank of China, BBVA, the African Development Bank, Siemens, Carnegie Bank, Rand Merchant Bank, the Hamburg Central Bank, and Mizuho Bank.

There are no available Videos from "Sarah Martin"