The Little Book of Valuation

This is a highly relevant topic for my work life. I don’t value companies, but being familiar with the concept is important. And who better to walk the reader through this than Aswath Damodaran, a finance professor at the Stern School of Business at NYU? In general, he presents a great way to get a deeper understanding of financial statements for any business person, whether investor, CEO, or owner.

This is also a great refresher for any finance professional because the other,┬ámore subtle thing this book does is help with the big picture of linking rows and columns of numbers to value. On the very last line of the book Damodaran says “convert stories to numbers,” which I find myself constantly trying to do for clients. Convert… link…, choose your word, but if you’re in finance you need to be able round-trip this concept. You need to be able to take stories, convert them to numbers, then convert the numbers back to stories.

Damodaran tells a lot of stories in this book and you can use his examples to learn how to distill business performance, risk, the market, etc… into a set of numbers that any business person can relate to.┬áThe first and perhaps most general story is an intrinsic valuation of 3M, which occurs in chapter 3. For your reference, here is a link to the PDF of the 2007 Annual Report that Damodaran uses (I was able to tie out about half of the numbers, I couldn’t figure out the others).

It may be worth pulling it up while you’re reading the book. I did it after the fact and it was helpful.

Like I do with a lot of business books, I made a reference sheet to refresh my memory on the topic, pull out some highlights, and give me an indication of where to go quickly if I need to look something up. You can see that it’s a pretty short book and can probably be read in just a few sessions. It should be more than enough information for 95% of the non-financial people out there.

It’s not a trend yet, but this is the second short and focused business book I’ve read this year. The other was Harvest, which concentrated on the topic of selling a small business. They are similar in length and scope. Reading them doesn’t prepare you to go out on your own and sell your company or value a firm, but they do arm you with a lot of specific knowledge that will guard against being confused or even mislead by so-called experts.

Finally, I just started following Damodaran’s Musings on Markets blog and it looks like he posts five or six times a month. He just finished a series of posts on valuing growth companies and uses Groupon as an example. It looks like good stuff and I have a feeling that it will help me “convert stories to numbers.”