The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

13. Ups and Downs: Cyclical and Commodity Companies

Uncertainty and volatility are endemic to valuation, but cyclical and commodity companies have volatility thrust on them by external factors. These include the ups and downs of the economy with cyclical companies, and movements in commodity prices with commodity companies. As a consequence, even mature cyclical and commodity companies have volatile earnings and cash flows. When valuing these companies, the danger of focusing on the most recent fiscal year is that the resulting valuation will depend in great part on where in the cycle (economic or commodity price) that year fell. If the most recent year was a boom (or down) year, the value will be high (or low).

This chapter looks at how best ...