Valuation: the 7 killer visualisations

A picture tells a thousand words. The emerging field of data visualisation transports this truism to business communication across a variety of fields.

Valuation is no different to other business; the valuer is tasked with communicating complex analyses as clearly as possible – and visualisations really help.

As a result, we often present visualisations that capture the sentiment of the entire valuation process really vividly – we call them killer visualisations. They are often the pages of the valuation presentation that consume all the focus of the discussion, with far greater resonance than the pages of words that accompany them.

Here are the seven that most often capture this attention:

The Mirror

The mirror is so named as it allows you to question your valuation assumptions just like looking at your face in the mirror. It is an examination of key value drivers over time, both considering how the business has performed in the past compared to expectations in the future and the same from competitors in similar fields. This reveals very quickly where forecasts have been inflated or expressed conservatively. Here is a simplified example:

 The Tornado

 The second analysis is called the tornado. You can clearly see why below. 

The tornado summarizes the impact of changes in key value drivers on value and ranks them from highest to lowest. This allows you - very quickly - to understand the key issues driving the valuation and evaluate the major uncertainties within the conclusions. 

Moreover, the more impactful the assumption, the better evidence behind your beliefs is usually required, so it focused the supporting valuation analysis very quickly on the most salient points.

The line of truth

Number three is the line of truth. This is a comparison of valuation multiples with a potential driver of those multiples, for example, revenue multiple against operating margins. It is useful to construct a trend line to summarise the impact of the variable of interest (if you have enough data you might even call it a regression analysis). In this simplified analysis you can see that the variable has a strong explanatory relationship with the multiple.

This single analysis allows you to reveal what the market values most in your comparable industry.

The MOT

In the UK, every year, your motor car needs to pass a roadworthy test, popularly called the MOT. The MOT analysis in valuation is a similar roadworthy test for your valuation. 

What the MOT (shown below) tells is the story of how values move over time within an industry, both from a point of view of market listed multiples and those implied from control transactions.

This allows you very quickly to understand where your peer valuation range is positioned over time and with respect to transactions.

 The flying brick

The flying brick compares the valuation outcomes of a range of techniques and contrasts these cross checks in one glance.

The flying brick is particularly useful when there's considerable uncertainty around the valuation. After all, cross-checks are more valuable when there are less reliability about any one conclusion in particular.

The value bridge

The value bridge explains the changes in value from one point in time to another. This allows the reader to quickly tell what's changed in the assessment of the value from one period to another. It is also used to bridge different scenarios or value for different stakeholders.

In this example, the changes from one period are explained in terms of operational and financial value drivers like cash flows and cost of capital.

These charts provide a really useful summary and also helps build credibility if you can bridge from a value that your stakeholder is already comfortable with.

The cloudy crystal ball

Valuation is the art of predicting the financial future. As with fortune tellers, a crystal ball comes in handy. Unfortunately, for those interested in spot predictions, the valuer’s crystal ball is a little cloudy.

The reason that crystal ball is cloudy is that valuers don’t view the future as one outcome (even though in a DCF they may summarise it that way[i]). The future is thought about as a range of possibilities each with a probability attached to it. This means that the future is a distribution not a point.

 This distribution has a range of potential insights - the first is considering the range of outcomes that could transpire.

 In the above example, you might pay a reasonable price (which for arguments sake would be at the midpoint of the distribution below), that you might win or lose approximately 50% of the time in the future. This gives a birds-eye view of the risk of your investment, which either allows you can to assess management options on, or whether you are willing to take the risk.

In addition, this distribution underpins the principles of option valuation. Mathematically, the value of a call option is the area to the risk of the point of the strike price. This mathematics is explored in the Black Scholes Merton formula.

Takeaways

Valuations are complicated business stories. Using graphical analyses or visualisations make your thoughts on value clearer and accordingly they will have much greater impact.

Valuations are complicated business stories.

The seven visualisations discussed above, tell value stories more effectively than pages and pages of financial analysis. I encourage you to think about using them in your next valuation report to increase the cut through of your insights around value.

-------------------------------------------------------------------------------------------------------------Richard Stewart OAM is a Corporate Value Advisory partner with PwC. He has been with them for 35 years in Australia, Europe and the USA, doing his first valuation in 1992. He has helped his clients achieve great outcomes using his value skills in the context of major decisions, M&A, disputes and regulatory matters. His clients span both the globe and the industry spectrum. He holds a BEc, MBA, FCA, FCPA, SFFin, FAICD and is an accredited Business Valuation Specialist with CAANZ. He has written two book, Strategic Value, and Hitting Pay Dirt, and is an Adjunct Professor at UTS. He thanks Siobhan Hall for her assistance in compiling this article.

[i] This is because the DCF cash flow is effectively supposed to the weighted probability outcome, discounted at the market price for residual uncertainty