Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Five – Valuing a company
and to separate cash and cash equivalent, from debtors (receivables) and from
other current assets. But it makes little sense in most cases to penetrate further
than that, and published balance sheets will separate out cash from short term
investments (a distinction that we can generally safely ignore) but may not
separate out debtors and creditors (payables) from other current assets and other
current liabilities, which we shall definitely want to do. Debtors and creditors are
an important part of the capital employed in the business whereas, for example,
other current liabilities are often dominated by tax liabilities that have accrued to
be paid within the next twelve months.
(Notice that under IFRS accounting, which Metro adopts, shareholders’ equity
includes the earnings generated during the year but does not exclude the dividend
announced with respect to the year. This is deducted from equity when it is paid,
and the following year’s earnings are added. So cash dividends and accrued
dividends are aligned and there is no current liability relating to dividends
announced but not yet paid.)
We would also often suggest lumping provisions (other long term liabilities)
together in the printed balance sheet, though their component parts may well
need to be modelled separately if they comprise, for example, deferred taxation,
provisions for pension obligations and provisions to cover restructuring costs.
But, as with the profit and loss account, we have kept the format of the Metro
model as close to that of the company’s accounts as possible.
1.1 Forecasting the business drivers
Whereas most of the components of a model of an industrial company are similar
to one another, as we shall see shortly, the main differences relate to the drivers
to revenue and cash operating costs. These are clearly industry specific. We are
not going to be able to cover all eventualities, though, as already indicated, we
shall try to give as many generic examples as possible. So, how are we going to
forecast our food retailer?
One approach would be to start from the macro: estimate annual expenditure in
food retailers in general, and then allocate an assumed market share to our
company. The other is to start from the bottom up. How many square feet of
space do we have, and what value of goods do we sell per square metre? The
latter also relates to the specific retailing concept of ‘like for like’ sales: the value
sold off the same space as the previous year, as opposed to increases (or
decreases) due to changes in the size or number of stores. Clearly, the two should
relate to one another.
As we are not trying to turn you into a food retail specialist, in our model we shall
take the second approach and ignore the first, but if you are a food retail specialist
it would be a good idea to add up all your revenue projections and see if they
come to a sensible figure. In addition, we have stopped at the level of revenue
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