Earnings and cash flow can be accurately and fairly recorded to be useful estimates of fair market or liquidation value. The
standard valuation principles and procedures are based on those used by professional appraisers.
For many types of companies, last year’s revenues and profits are rarely an accurate indication of the dynamic revenue
opportunities the future may hold. By definition, historical
measures of return can’t accurately gauge the impact of that management plans involving new products or services or cost
savings plans or synergistic mergers will have on company value. It is always necessary to keep an eye on the future when it comes to holistic business valuation. It’s a cornerstone
of modern financial theory that the value of any asset (or collection of assets) is the ‘risk-adjusted, net present value’ of all future cash flows.
In the future, most companies will evolve from ‘the idea’ to ‘the product’ to ‘revenue and product growth’ to ‘margin growth’ to ‘maturation’ and then ‘decline’ as the life cycle unfolds.
Growth can be negative for the first time, causing the firm to sell less productive assets or otherwise downsize. The
company may be generating returns below the cost of capital. The possibility of failure (insolvency or bankruptcy) emerges 116
