Constant Investor: What’s the most important tool for valuing a company?

Assessing debt and equity provides a more complete approach

‘At Avenir Capital, when valuing companies, we prefer to look at the value of the entire enterprise including both equity and debt. Much like a private equity firm we approach buying the shares of a company as if we were buying the whole company which helps to drive a more explicit recognition of the capital structure the firm currently has along with its future capital spending needs. By estimating the future cash flows available to all security holders of the company, both debt and equity, we can then subtract the value of the debt to estimate the company’s equity value. As a final step, we can then divide the company’s total equity value by the number of shares outstanding to determine an equity value.

We believe applying a private equity approach to investing in the public market is a preferable approach. It is a more complete approach and is more consistent with our preference to invest with a long-term owner’s mentality as if we were buying the whole business. This, in turn, helps to ensure we focus appropriately on the quality of the business and on long-term fundamental value rather than on the short-term gyrations of a share price flashing across a screen.’

Adrian Warner, Chief Investment Officer at Avenir Capital

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The Constant Investor: What’s the most important tool for valuing a company?

Written by Adrian Warner

Chief Investment Officer

Adrian Warner is the Managing Director and Chief Investment Officer of Avenir Capital and is responsible for the portfolio management of the Avenir Global Fund. Prior to founding Avenir Capital, Adrian worked in private equity investment in Australia, Asia and the United States with an investment record spanning over 20 years.