Methodology
Below is a brief summary of the Trefis approach to valuation. This is meant to provide a quick background for professionals trying to better understand the Trefis approach and how to find what they need within Trefis Excel models.
Additional details about Trefis can be found in the About Us and FAQ sections. Specifically, the FAQ contains answers to more advanced valuation and methodology questions.
Trefis Approach to Valuation: Sum of the Parts & DCF
The Trefis approach to valuing companies is based on sum of the parts and discounted cash flow (DCF) analysis. We value each division of a company by discounting the projected cash flows over our forecast period and the cash flows expected beyond. The projected cash flows are driven by our individual forecasts for the key operating metrics of each division. We then sum the individual divisional valuations to determine the Trefis company-wide valuation and calculate the resulting price per share.
Trefis Core Principles: Structure, Transparency & Modifiability
Structure, transparency and modifiability are our core principles. The Trefis analysis of each company shown on the Trefis site is structured by division and by forecast within each division. Our forecasts and the corresponding rationale are transparent to all and each forecast assumption that has an impact on the Trefis price is modifiable by users.
By downloading a Trefis Excel model, you're accessing the underlying numbers and formulas that drive the Trefis analysis shown for a company on our site. Each forecast impacting the Trefis price estimate is visible and modifiable via our site for professionals.
Tracing Historical Figures in Trefis Models
Whenever available we take figures provided by the company through their financial filings, press releases, investor presentations or other publicly available information. In many cases, we use historical numbers publicly available by third-party sources or by triangulating figures using available information and reasonable assumptions based on our understanding of a business. For each forecast, we have a section called "How we got historical data" which explains how the historical data for that particular forecast was attained.
Trefis Excel Model Organization and Structure
The sections below provide a synopsis of how Trefis Excel models are organized. We recommend reading this in conjunction with a Trefis Excel model handy. Click here to download a sample Trefis Excel model for free.
Data & Bridge Tabs
Trefis Excel models have two primary tabs:
- Data - The Data tab contains the fully functioning company model in a single tab
- Bridge - The Bridge tab helps reconcile key line items like revenues, gross profits, EBITDA and unlevered cash flows as shown by Trefis to that reported by the company. Oftentimes these key line items incorporate adjustments made by Trefis which can be easily identified via this tab.
Many models include additional supporting tabs beyond the Data and Bridge tabs.
Understanding the Data Tab
Within the Data tab, the models are often organized in similar ways:
Top Section - Valuation Summary & Capital Structure
The top sections of the Data tab show the overall Trefis price estimate per share and overall valuation (Trefis market cap) for the company. The share count and net cash or net debt figures used are shown. The overall valuation is a sum of the individual divisional valuations which are also summarized in this section.
Middle Sections - Divisional Forecasts & Valuation
To understand the valuation of a division you will need to navigate to the part of the model within the Data tab that lists out the forecasts for that division. Typically the bulk of the Trefis model within the Data tab consists of blocks of forecasts where each block represents a specific division and is clearly labeled as such.
Most divisional blocks are structured similarly. The beginning section shows the forecasts that drive the division's revenues. The middle section shows the direct expense calculation and the allocation of company-wide indirect expenses to the division. The sum of these two expenses (direct and indirect) constitutes the total costs of the division. The difference between the divisional revenues and total costs is the division's cash profits, representing unlevered cash flows for all non-financial services divisions.
These cash profits are then discounted at the discount rate shown. The cash profits in the last forecast year are extrapolated into perpetuity based on a terminal growth rate and this terminal value is discounted as well. The sum of the discounted cash flows constitutes the divisional valuation.
End Section - Indirect Expenses & Other Cash Flow Items
Toward the end of the model shown in the Data tab, you will see indirect expense and operating cash flow items such as:
- Company-wide corporate expenses (e.g. SG&A, R&D)
- Taxes
- Capital expenditures
- Changes in net working capital
- Changes in net other operating assets
You will also see a summary of total company-wide unlevered cash flows and total indirect or corporate expenses. The total company-wide unlevered cash flow in a given year is equivalent to the sum of the individual divisional cash profits in that year.
Further Reading
See the FAQ for further details. Please note that many community features have been disabled for your firm. Consequently the related FAQ items are not relevant.