What Are Value Drivers?
The classic answer to what drives the financial value of an investment is SGLPTL. This acronym stands for:
Size, Growth, Leverage, Performance, Turnover, and Liquidity.
It is easy to observe in the market that larger companies demand and receive higher prices for their stock than do smaller ones and that doesn’t matter much how you measure size. Bigger is better!
The greater the expected growth and the longer period of time it can be sustained, the greater the value attached to that investment. In times of irrational exuberance as in the year 2000, companies that could demonstrate the ability to grow rapidly often reflected rising prices for their stock even though they also had rising losses.
Businesses that have the ability to raise capital in the debt market are more highly prized than those that must depend solely upon equity investors. It is the ability to borrow not the presence of debt that increases the perception of value.
There are many different measures of financial performance. Those companies that can consistently produce the highest returns for the least amount of risk enjoy relatively higher market prices for their stock than those that are either inconsistent or just not getting the job done.
Similar to performance, turnover measures how efficiently the company employs its various assets. Using less to make more is perceived as good, allowing the investor to expand and diversify.
The company that has lots of cash will be preferred over the one that has much of its assets tied up in long term investments with little ability to adapt to change.
DLOM & DLOC: How they Affect BusinesS value
Levels of value and the associated discounts and premiums can be complex issues that are often difficult to understand for most individuals not formally trained in business valuation.
The differences between minority and control values and marketable versus nonmarketable values are often subtle.
Merrimack Business Appraisers keeps abreast of the latest peer-reviewed methods regarding when a Discount for Lack of Marketability (DLOM) or a Discount [or Premium] for Lack of Control (DLOC) should be applied, and fully explains the appropriate degree of adjustment when required in providing its business valuation services.