Enterprise Value Assessment And Driving Factor Analysis Based On Free Cash Flow

In recent years,BYD’s share price has fluctuated in the Hong Kong market,and investors are divided.After the Black Swan incident in 2014,BYD’s investment rating declined again in a Morgan Stanley report in early 2019.How should investors and management correctly evaluate BYD’s intrinsic value against the background of frequent stock price fluctuations?This requires a reasonable evaluation of its value.Among many evaluation methods,this paper chooses the discount method of free cash flow mainly for three reasons.First,the company’s free cash flow is at the inflection point.The author finds that BYD’s free cash flow has been negative in the past five years.By simple calculation,in 2019,the free cash flow will be negative and positive.Second,the method of enterprise value evaluation based on discounted free cash flow model can effectively reflect the long-term development potential of companies.Thirdly,on the basis of this evaluation method,we can find out the driving factors of enterprise value creation,which is of great significance to business managers and potential investors.Combining with BYD’s historical data,this paper firstly analyses its development status and historical performance from three perspectives: macro,industry and company itself,and reorganizes its financial statements.Then it forecasts the future performance of the company,compiles the balance sheet and profit statement for forecasting management,calculates the free cash flow,estimates the value of the enterprise,and then compares the evaluation results with the P/E ratio model.Subsequently,according to the evaluation results of the free cash flow discount model,aiming at BYD’s development status and industry characteristics,using the value-driven factor analysis method,the source and weak links of value creation are found,and suggestions for improvement are put forward.This paper compares the evaluation results with the market value,and provides two suggestions for investors.(1)The valuation results of this paper are 59.55 yuan per share,and the closing price of BYD in Shenzhen Stock Exchange is 51 yuan per share on December 28,2018.The market results are lower than the evaluation results,and the enterprise value is underestimated;(2)In recent years,under the background of vigorous support from the national policy,BYD’s new energy vehicles have frequently appeared at the top of the sales list,with broad prospects for future development and great investment potential.This paper suggests that investors increase their investment potential.Through the analysis of value driving factors,this paper finds out the key factors affecting the value creation of enterprises.By ranking,BYD value-driven positive factors in order of importance are:(1)business income;(2)sustained growth rate.Reverse influencing factors in order of importance are:(1)operating costs;(2)capital structure;(3)income tax rate;(4)period expenses,mainly involving management expenses and sales expenses;(5)accounts receivable;(6)capital expenditure,mainly involving long-term equity investment and development expenditure.Based on this,the paper finally proposes ways to enhance the value of enterprises from three perspectives: increasing the free cash flow of enterprises,reducing the cost of capital and improving the ability of sustainable growth,so as to provide reference for management decision-making.