Overview

Corporate Valuation

In this guide, we use various corporate finance techniques to build a financial model for a company called Caterpillar, Inc – a world leader in the manufacture and sales of large-scale earth moving equipment, to try to come up with an initial estimate of the company’s value.

Building a financial model of this type is not a trivial task! It requires a good understanding of CAT’s business, some strong business modelling skills, and a healthy dose of financial deviousness (otherwise we would never get to the end of the exercise!)

Furthermore, to be useful, any kind of financial model needs to:

  • match the situation at hand, and
  • not be overly complicated that the user cannot understand why the results happen

This is whether a user is seeking better valuations, better estimates of credit worthiness, or simple common sense predictions of how a firm or project might look several years down the road.

Pro-Forma

The focus of this guide is to: better understand Caterpillar’s financial statements for the years 20X1 to 20X5, so that a set of pro-forma financials (projected financials that exclude unusual and non-recurring transactions) can be built from them.

This is not that easy, as building a pro-forma model can require making a lot of assumptions and analysis – which can be irritating! However, in the case of this guide, the exercise illustrates a very important application and priciple of Corporate Finance – the valuation of a company in the framework of its Financial and Accounting parameters.

Such valuations typically form the core of most business plans, corporate financial planning models, M&A models, and (intelligent) analyst valuations.

Worksheets

The main purpose and function of each tab in the workbook illustrated through this guide is summarised below:

Name of tab Purpose & Function
P&L Catrpillar’s Profit & Loss, 20X1 to 20X5
BS Catrpillar’s Balance Sheet, 20X1 to 20X5
BS Rewritten Catrpillar’s Balance Sheet Re-written (to simplify), 20X1 to 20X5
CFS Catrpillar’s Consolidated Statement of Cashflows, 20X1 to 20X5
Sales Projectsion Some simple statistical modelling to project Caterpillar’s future sales
Current Assetts & Liabilities Some simple modelling to estimate Caterpillar’s ‘CA to Sales’ and ‘CL to Sales’ ratios that can be applied to future years
Operating Costs Some simple statistical modelling to project Caterpillar’s operating costs
Fixed Assets & Dep Some simple modelling to estimate Caterpillar’s ‘PPE to Sales’ ratio, and ‘Depreciation Rate’ that can be applied to future years
Dividends Some simple statistical modelling to estimate Caterpillar’s future dividend payouts
Other Liabilities Some simple modelling to estimate Caterpillar’s future ‘Other Liability’ and ‘Pension Liability’ balances
Tax Workings to estimate the applicable Tax Rate to Caterpillar for future years
The Plug Some simple modelling to estimate Caterpillar’s ‘Cash to Sales’ ratio, and ‘Debt to Sales’ that can be applied to future years - leaving the Treasury Stock line as the Plug
ProForma The final Pro-Forma model built for Caterpillar to estimate its value through a ‘Mid-year discounted’, ‘5-year Horizon + Terminal Value’ DCF calculation

The rest of this guide goes through each tab, of the workbook, in further detail.

Click ahead to find out more!

Concepts

If you’re not familiar with certain Corporate Valuation concepts and methods, you can read more about the topic, and different valuation methods, often used in practice, here: Corporate Valuation Concepts

Valuation Template

If you would like to open the Valuation Template illustrated throughout this guide, in your own local spreadsheet software, you can download the full file here: Corporate Valuation Template - Caterpillar