Value investing · Course 34 of 39 · Valuing a business
Valuation from the accounts
Residual income turns a return above the cost of equity into currency, values a company as book value plus what is left, and runs backwards against a price.
For a reader who can compute a return on equity and has never converted it into money. A return of 20 percent against a cost of capital of 8 percent is a spread of 12 points. Residual income is the arithmetic that turns that spread into a figure in dollars, and then into a valuation built out of the balance sheet rather than out of a forecast of cash.
After this course you can state the clean surplus relation and show where a real company breaks it, compute residual income from filed figures, value a company as book value plus the present value of what is left, say what economic value added adjusts and what the adjustment costs you, solve backwards for the growth a market price requires, and name the companies whose accounts are firmer ground than their cash flows.
It assumes Valuation in practice, Cost of capital and the bookkeeping behind a balance sheet. Every figure in it comes from a named filing.
The model, not your inputs
Valuation from the accounts is 6 lessons on how a valuation is built and which assumption it really turns on. Every input is still yours to supply, this course supplies none of them, and a model with no company in it produces no number you can act on.
See our methodology for how the product reads a filing and what it refuses to compute.