10 - Valuation of different industry sectors

Abstract

Discounted cash flow valuation method and return to economic fundamentals are suitable to value internet companies. Simple relative valuation methods like price to earnings (P/E) is not suited to value internet companies. Financial services reinvestment basically focuses on intangible assets like brand names and human capital. Dividend discount model, free cash flow to equity, asset valuation models can be used to value financial services firms. The relative value metrics used for valuing financial institutions are P/E, price-to-book, and price-to-sales ratios. CAMEL is an internal supervisory tool for evaluating the soundness of a financial institution. The financial indicators used to evaluate the performance of insurance companies include growth in gross and net premium, profit from underwriting, average profit per branch and employee, average annual cost per employee, and return on investment. The major profitability ratios used to evaluate insurance companies are return on equity (ROE), recurring ROE, and one-time ROE. Embedded value (EV) is an important value metric for life insurance companies. The risk-adjusted performance measures for mutual funds are evaluated by Sharpe ratio, Treynor ratio, and Jensen alpha. The market value of biotechnology firms is based on the company’s intellectual property. The major valuation models for valuation of biotechnology firms are the discounted cash flow, the royalty or licensing model, and relative valuation model. The three basic approaches for valuing investment properties are sales comparison or market approach, cost approach, and earnings or income capitalization approach. Important financial indicators in oil and gas sectors include enterprise value/EBITDA, reserve replacement efficiency, reserve replacement ratio, margin per BOE, per share growth of reserves and production, enterprise value/discretionary cash flow and finding costs/depreciation, depletion and amortization.