The Dark Side of Valuation
The volatility in earnings at cyclical and commodity firms, with macro factors at play rather than firm-specific issues, can make it difficult to value even the most mature and largest firms in the sector. In many cases, errors in valuation arise either because analysts choose to ignore the economic or commodity price cycle or because they fixate on it.
Base Year Fixation
When valuing companies, we tend to put a great deal of weight on current financial statements. In fact, we would not be exaggerating if we said that most corporate valuations are built with the current year as the base year, with little attention paid to the firm’s own history or the performance of the overall sector.
While this fixation on the current ...
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