What are the most effective ways to measure value creation?

EVA is an effective framework for measuring shareholder value creation or otherwise for more mature firms or asset rich firms. Here, it is implicitly assumed that the external factors that influenced a firm in the past continue to influence the firm in the future largely to the same degree. In practice, NOPAT is adjusted for depreciation, research expenses, and spending for creating intangible assets (e.g. patents). Also, many practitioners make market value adjustments to capital employed.

Accounting and business always have their versions of defining value-generating companies. Let's understand a few nuances from my experience 1) NOPAT is not a reliable indicator of shareholder wealth as it doesn't account for cash left. In other words, EVA is not well suited for companies with intangible assets. 2) WACC is a complex attribution of capital structure (equity vs debt), firm's leverage potential(increase debt to equity ratio to reduce WACC), and market volatility(beta). 3) It doesn't factor in the Company's growth potential (E.g, a high-growth industry or market segment with a substantial TAM) Bottomline - Arguably one of the best valuation tool, where the focus is on increase shareholder's wealth and net operating profit.

The DCF method for measuring corporate valuation presents several practical challenges: 1)How do you forecast revenue and its growth? 2)What figure should be used for the Weighted Average Cost of Capital (WACC) as a discount rate? 3)More challengingly, how do you measure the equity risk premium related to WACC? The tricky aspect is that the valuation outcome can vary significantly with even small differences in the WACC and growth rate assumptions. Accurately or even reasonably determining INPUTS for these factors is often elusive, leading to a scenario where numbers are frequently adjusted. One solution to this issue is to employ multiple valuation methods and compare them to determine a final figure, which may be presented as a range.

DCF method is used to determine an investment's 'Fundamental value' i.e. its present & future cashflows as it doesn't depend on market sentiment and valuation multiples for certain industry segments. DCF could be a good tool for mature companies with predictable returns and revenue from multiple sources. DCF is not optimal for startups & early stage, companies with cyclical revenue. From a practioner's view point, here are a few nuances with DCF methodology 1) How well you determine discount rates for valuing assets (The Risk Profile) 2) Forecasting accuracy of your future cash flow (revenue, profitability etc.) 3) Estimating the terminal value for any business. 4) DCF sensitivity analysis vis-à-vis WACC, Revenue growth rate & margins.

En este apartado me gustaría agregar que los múltiplos del mercado deben complementarse o ratificarse con otros métodos como el EVA, el cash-flow descontado u otros métodos alternativos de valuación. Los múltiplos de mercado no debe utilizarse como único método, porque pueden incluir sesgos importantes aunque se utilicen como referencia dentro de la misma industria. Un ejemplo de ello es el de empresas, que aunque dentro de un mismo segmento, pudieran estar atravesando por ciclos de crecimiento distintos como el caso de un aumento en las nóminas de operaciones por el lanzamiento de nuevos productos. Este es un caso típico donde podemos encontrar diferentes EBITDAS, los que a su vez potencian sus diferencias por el uso de múltiplos.