Reading 'The Valuation Textbook' allowed me to think about corporate valuation from a practical perspective
Since I started working in M&A, I have felt anxious about valuation.
I know terms like DCF, WACC, PER, PBR, and ROE.
However, if asked how to use them in actual deals or how well I truly understand them, I would honestly have to say it was quite vague.
In particular, corporate valuation is a critical issue in M&A.
How do you view the value of a target company? Is the acquisition price reasonable? What can be read from financial analysis?
I was worried that if my understanding remained shallow in such situations, I wouldn't be able to keep up with the practical work.
It was in this context that I read 'The Valuation Textbook: The Essence and Practice of Corporate Value and M&A' by Akira Morio.
This book covers everything from the basic structure of corporate valuation to DCF valuation, multiple valuation, M&A, risk, and business turnaround.
Toyo Keizai also introduces it as a fundamental text that explains corporate valuation as a 'common language' for overseeing daily decision-making and management.
What I felt after reading it was that valuation is not just a calculation technique, but a way of thinking about how to view a company itself.
Even if I knew DCF and WACC, I had no image of how to use them in practice
Before reading this book, I knew terms like the DCF method and WACC.
However, I only knew them as concepts, and I did not understand how to actually calculate them or how to connect them to corporate valuation.
For example, even if you calculate corporate value using DCF, how do you estimate future cash flows?
How do you set the WACC, which is the discount rate?
Also, even when looking at indicators like PER, PBR, and ROE, I was only looking at them individually and was not really conscious of the connections between the indicators.
In engaging in M&A practice, I wanted to bridge the gap between valuation theory and practice.
DCF is not a 'formula,' but a process of building up assumptions
After reading this book, my image of how to use the DCF method, which I had known as a concept, in practice became a bit more concrete.
What left a particularly strong impression was the practical calculation method for WACC.
Use the 10-year government bond yield as the risk-free rate.
Check the equity market premium from external websites and the like.
Obtain beta from information sources such as Reuters.
Build the cost of capital based on those figures.
Until now, I had viewed WACC as a formula in a textbook.
However, I realized that in practice, it is important to know where to get each parameter and what assumptions to make.
I felt that DCF is not just about plugging numbers into a formula, but a process of thinking about corporate value while setting assumptions one by one.
Breaking down PBR, PER, and ROE changes how you view a company
Another major realization was the relationship between the indicators.
What left a particularly strong impression was PBR as
PBR = PER × ROE
is a way of looking at it.
While PBR is viewed on its own as the 'Price-to-Book Ratio,' breaking it down into PER and ROE makes it easier to see how the stock market evaluates a company's profitability and future potential.
Furthermore, ROE can also be broken down into
ROE = ROA × Financial Leverage
as well.
Looking at it this way, even for companies with high ROE, we can think separately about whether the profitability of the business itself is high, or if it just appears high due to financial leverage.
When looking at a target company for M&A, it is not enough to simply see that 'PBR is low' or 'ROE is high.'
I realized that by breaking down what those indicators are composed of, one can get closer to the reality of the company.
Valuation is connected to financial analysis
After reading this book, I felt that valuation and financial analysis are not separate things, but are quite closely connected.
To perform a DCF, it is necessary to estimate future FCF.
To do that, one must understand sales, profit margins, working capital, capital expenditures, depreciation, and so on.
Also, even when performing multiple valuation, it is necessary not just to apply multiples like PER, PBR, or EV/EBITDA, but to understand the differences between the target company and its peers.
In other words, I realized that valuation is not just a task of plugging in numbers, but a task of reading financial statements, understanding the business, and thinking about the premises.
Enabling the ability to break down and view target companies
I think there will be times when I use the DCF method in my practical work in the future.
At that time, I want to make use of the WACC calculation methods and FCF estimation methods I learned in this book.
In particular, regarding WACC, I want to be able to explain each premise myself—such as the risk-free rate, equity market premium, beta, cost of debt, and capital structure—rather than just memorizing the formula.
Also, in financial statement analysis, I want to try to think by breaking things down into their constituent elements rather than just looking at the numbers as they are.
Analyze the target company over time.
Compare it with peers in the same industry.
Break down PBR, PER, ROE, ROA, financial leverage, etc., to see where the strengths and weaknesses lie.
By accumulating such analyses, I want to gradually become able to contribute to valuation practice in M&A.
This book is recommended for the following people
Before reading this book, although I knew terms like DCF and WACC regarding valuation, I did not really understand how to use them in practice.
After finishing it, I felt that valuation is not just about calculations, but is a way of thinking itself about how to view and evaluate a company.
In particular, this book is recommended for those who have become involved in M&A or financial analysis but feel uneasy about the practical sense of valuation.
It is also suitable for those who want to understand terms like DCF, WACC, PER, PBR, and ROE by connecting them as a line rather than as isolated points.
This book is recommended for those who want to acquire corporate valuation as a practical way of thinking rather than just memorizing formulas.
These are also recommended for corporate valuation