The 6 steps framework from Aswath Damodaran
1. Confirm the timing and currency
- What period is covered?
- What currency are they reporting in?
2. Map the business mix
- What period is covered?
- What currency are they reporting in?
3. Find the base inputs for valuation
From the Balance Sheet
- How much debt does the company have?
- Does the company have more current assets and current liabilities?
- Does the company have a lot of goodwill on its balance sheet
From the Income Statement
- Are revenues steadily increasing over time?
- Does the company need a lot of COGS to sell its products?
- How much revenue is translated into net income?
From the Cash Flow Statement
- Are most earnings translated into operating cash flow?
- Does the company have a positive free cash flow (operating cash flow — CAPEX)?
- Did the company manage to increase its cash position compared to last year?
4. Keep digging In the footnotes look for
- Does the company use a lot of SBCs? [SBC = Stock Based Compensation]
- When does the company’s debt mature?
5. Confirm The Units
- How many shares outstanding does the company have?
- Does the company have preferred shares?
- Are acquisitions paid with stocks?
6. Corporate Governance
- Do insiders get special privileges?
- Does management have a lot of skin in the game?