valuation and risk management print-to-fit

8/18/2019 Valuation and Risk Management Print-To-Fit

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1. Building blocks for valuation

1. Operations The key element that distinguishes Print-to-Fit from other companies is the patent they haveon the technology with which they print customer designs on blank apparel items. In this waythey have created a unique market position. Research and development skills are veryimportant in their business.

2. Risk prolePrint-to-Fits business is protected by a patent on the technology to manufacture printers thatcan print customer designs on apparel items. !owever" the risk another company will inventanother way to easily print designs on clothing" and thereby by-pass this entry barrier" is likelyand increases their risk pro#le. If Print-to-Fit would be able to manage its activities in asustainable way by depleting competitive advantages" it would continue to hold a goodmarket position with great future perspectives since there is a growing trend to be noticedtowards customer preference for unique" customi$ed products. % problem that will appearwhen this doesn&t succeed is their limited diversi#cation of products" which would have anegative impact on the risk pro#le. Furthermore Print-to-Fit is not very dependent on speci#csuppliers since a lot of companies produce items needed to make printers" which decreases

the height of its risk pro#le. 'n the other hand" Print-to-Fit is quite dependent on itscustomers( companies and stores who believe in the idea to let customers design their ownclothes" which increase the risk pro#le of Print-to-Fit. In short we can conclude that the riskpro#le of Print-to-Fit is not that high but that it is likely to increase because of possiblecompetition that is likely to enter the market in the future if the concept appears to be asuccess and if the research and development departments of possible competitors #nd waysto by-pass the patent.

3. Fixed assets The #)ed assets are not enough speci#ed to compare the market value and the book value.*e cannot assess revaluation surpluses that lead to ta) e+ects either. There are nocontractual provisions concerning rent to pay on #)ed assets on the balance sheet. The

company is planning to e)pand its plant" equipment and its other assets heavily in theupcoming years.

4. Euip!ent and !ac"iner# The equipment and the machinery is not enough speci#ed to compare the market value andthe usage value neither to assess the ta) e+ect. Furthermore we do notice a capitali$ed leaseon the balance sheet. *e assume that all leases are capitali$ed and that there are nooperational leases.

$. Return*hen looking at the return on equity of Print-to-Fit we notice this return is very high and willdecrease to a lower" but still quite high" level according to the conservative foresights. *e do

not have enough information to assess whether normali$ation processes are needed but wehave to take in consideration that this could be necessary and would change our results.

1993 1994 1995 1996 1997

Return on equity 0,41 0,24 0,18 0,20 0,18

%. Excess resourcesIf we calculate e)cess cash by calculating operating cash by taking , of the sales anddeduct this amount of the cash and marketable securities we #nd the results below. The facte)cess cash is very low is a good thing since the presence of a lot of e)cess cash in anenterprise would not be attractive for a potential buyer of the company. *e do not have

enough information to assess other possible e)cess resources but do notice Print-to-Fit hasvery high inventories.

/ourse material %dvanced Financial 0tatement %nalysis( Palepu" !ealy" 1 Peek23456" &&7usiness %nalysis 1 8aluation" IFR0 edition&&


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1993 1994 1995 1996 1997

Excess cash 0 0 0 256,53 544,01

&. 'orking capital reuire!ents The working capital requirements are lower at the time of the valuation than the normale)pected future values. *e do not have enough information to assess possible over- orundervaluation.

1993 1994 1995 1996 1997

NWC 1582,4 2705,1 4409,9 4179,1 5924,6

(.)idden liabilities*e don&t have a lot of useful information concerning possible hidden liabilities but we do"however" consider it likeable social liabilities to be present 2amount depends on the amount of personnel6. Furthermore we notice Print-to-Fit has quite some investment plans concerning itsplant and equipment and its other current assets.

*. )idden assetsPrint-to-Fit has distinguished itself clearly from other companies by the techniques created bytheir research and development department. This implies hidden knowhow in the department"which leads to R19 results.

2 Building blocks for discounted cas" +o, valuation

Building block 1 - as" +o,

/01**3

/11**4

/21**$

/31**%

/41**&

5E6/7E/ 'R

Trades receivable 344": 34;


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:;E<

%ccumulated depreciation =., ,=.: ,;.3 54?.; ;=4.3

Bearly depreciation


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44 =4 44

': 8 12@0&*A


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Building block 3 - >ro,t" rate

%ssumption e)pected growth rate ==,-344, competitive advantage based onpatent and synergy

4

C)pected growth rate 344,-in#nity basedon inGation of the FC9

3"44


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=iscounted cas" +o, to t"e r! and to euit#

4 rossc"eck C 7ultiples%s an alternative valuation method we use the multiples method as a crosscheck for theenterprise-9/F and equity-9/F method. To use this method" assumptions need to be made.

Therefore we assume that(. The company is perfectly comparable 2this means operational as well as #nancial6.3. The value of the comparable company is correct.

%lthough Print-to-Fit is a computer manufacturing company" the #rms future lays in theretailing business. %ccording to the rules of thumb a common used multiple for the retailindustry is P0. To use this multiple we add an e)tra assumption(

5. Heverage is similar across #rms.

1 2 3 4 $ % & ( * 10 11 12 13 14F/FF

-5?


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Ksing the general retail multiple; we #nd the following numbers(

;H6

Retail 2Leneral6 4"

valuation and risk management print-to-fit

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