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Valuation Measuring and Managing the Value of Companies

A comprehensive guide to creating corporate value by mastering the principles of valuation, centered on the core drivers of return on invested capital (ROIC) and growth, and applying them to strategic decision-making.

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What it’s about

Valuation, from the esteemed corporate finance practice at McKinsey & Company, demystifies the complex world of corporate valuation by anchoring it to a single, powerful principle: companies create value by investing capital at a return that exceeds their cost of capital. This definitive guide moves beyond theory to provide a practical, step-by-step framework for measuring and managing company value. Readers will learn how to analyze historical performance, forecast cash flows using the discounted cash flow (DCF) method, and understand the fundamental drivers of value—return on invested capital (ROIC) and revenue growth. Critically, the book teaches how to apply these insights to make superior strategic decisions in areas like portfolio management, mergers and acquisitions, capital structure, and investor communications, all while navigating the pressures of short-term market expectations to build sustainable, long-term health and wealth for the corporation.

The through-line

Who it’s for
A corporate leader, manager, or investor who wants to make sound strategic and financial decisions to create sustainable, long-term value for their company or investments.
The problem
Making critical business decisions is difficult due to a bewildering array of metrics (EPS, stock price, accounting profit) and intense market pressure for short-term results, leading to a disconnect between strategy and financial outcomes. They feel uncertain about which strategies truly create value, frustrated by the market's seeming irrationality, and pressured to sacrifice long-term health for short-term gains.
The plan
  1. Master the core principles of value creation: the relationship between Return on Invested Capital (ROIC), growth, and cash flow.
  2. Learn the step-by-step techniques for discounted cash flow (DCF) valuation to accurately measure intrinsic value.
  3. Apply valuation principles to make superior strategic decisions regarding portfolio strategy, M&A, capital structure, and investor communications.
The payoff
Confidently making strategic decisions that are grounded in economic reality and create sustainable, long-term value. · Effectively communicating the company's long-term strategy and value potential to investors and the board. · Aligning the entire organization behind the disciplined pursuit of value creation, leading to a healthy, prosperous, and enduring company.

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Additional reading

  • Principles of Corporate Finance · Richard Brealey, Stewart Myers, and Franklin Allen

    The book references this seminal textbook as a key source for the 'conservation of value' principle, indicating it as a foundational academic text for the book's approach.

  • Works by Alfred Rappaport · Alfred Rappaport

    He is acknowledged as one of the first to extend the Miller-Modigliani enterprise valuation formula to real-world applications, directly influencing the practical methods in this book.

  • Works by Joel Stern · Joel Stern

    He is also acknowledged, along with Rappaport, as a pioneer in applying enterprise valuation formulas to practical business problems, shaping the discipline this book operates in.

  • Strategy Beyond the Hockey Stick · Chris Bradley, Martin Hirt, and Sven Smit

    This book by fellow McKinsey authors is referenced for its research on the core drivers of top-performing companies, providing an empirical basis for the strategic management advice in Part Four.

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