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DCF Valuation: the Interrelation between the Dynamics of Operating Revenue and Gross Investments

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  • Dimiter Nenkov
  • Yanko Hristozov

Abstract

The current research paper explores some key aspects of the application of the DCF enterprise valuation. This paper presents the second part of a broader study by the authors, which is focused on the analysis of key input variables, predetermining the amount of free operating cash flows as an important part of the application of DCF valuation models. Here are the most serious prerequisites for deviation of forecasts from reality, which often leads to a significant distortion of the final valuations of enterprises. This provokes the research on the interdependence between the five main input variables and especially between operating revenue on the one hand, and the different expenditure groups, on the other hand, is required. In the first part of this research, the relationship between operating revenue and operating expenditures was investigated. In the present research paper, the relationship between operating revenue and gross investment expenditures is investigated, including the increase in net operating working capital and capital expenditures. The research was again carried out on the basis of aggregated data for all non-financial enterprises in Bulgaria for the period 2008-2020. The results are generally ambiguous, but in the medium and long term, at least for some of the largest sectors explored, relatively representative and sustainable averages are established for the relative share of net operating working capital and capital expenditures to revenues. There are no strong arguments against forecasting gross investment costs based on their historical averages as a percentage of operating revenue.

Suggested Citation

  • Dimiter Nenkov & Yanko Hristozov, 2023. "DCF Valuation: the Interrelation between the Dynamics of Operating Revenue and Gross Investments," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 114-138.
    • Handle: RePEc:bas:econst:y:2023:i:7:p:114-138
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    References listed on IDEAS

    as
    1. Franck Bancel & Usha R. Mittoo, 2014. "The Gap between the Theory and Practice of Corporate Valuation: Survey of European Experts[We are ext]," Journal of Applied Corporate Finance, Morgan Stanley, vol. 26(4), pages 106-117, December.
    2. Yanko Hristozov, 2021. "Liquidity of Non-financial Corporations: Evidence from Bulgaria," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 3, pages 389-406, September.
    3. Pablo Fernández & Andrada Bilan, 2013. "110 Common Errors in Company Valuations," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 33-78.
    4. Galya Taseva, 2019. "Passivity of Creditors among Non-Financial Enterprises in Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 128-159.
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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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