#### INTRODUCTION TO VALUATION PD-DD

In our previous article, Yatırım Çiğ Köfte A.Ş. started to operate and at the end of a year had a net profit of 32,000 TL. Our company's equity also increased from 300,000 TL to 332,000 TL. Now, we established our company for 300.000 TL and issued 300.000 shares, one of which is 1 TL, representing our capital.

The share value of our company was 1 TL at the establishment stage. However, since we made a net profit of 32,000 TL at the end of the first year, our equity capital is now 332,000 TL. Therefore, we need to make a new calculation to find the book value of our company. When we divide the equity capital of our company by the number of shares, we will find the book value of our company.

Now, according to our new book value, the value of one of our shares is 1.1066 TL (rounded to 1.11 TL in the above calculation.300.000 shares * 1.1066 TL = 332.000 TL) In other words, the investor who bought the shares of this company for 1 TL at the end of the first year It acquired a company with a book value of 1.11 TL.

Let's say I open this company to the public and want the market price of my company to be determined on the stock exchange. For this, I applied to the necessary authorities and sold the part corresponding to 33.333% of my partnership shares, that is, 100.000 shares out of 300.000 shares to various institutions and investors in the stock exchange. Now the market will decide what the price of one stock of my company should be. Therefore, the company will now have a market value. The market value of a company is found by multiplying its market price by the total number of shares. Let's say the stock price of our company is traded at 2 TL on the stock exchange. Therefore, the market value of our company;

According to the above calculation, the market value of our company is 600,000 TL. Let's come to one of the rates that investors use most as market multipliers in the stock market.

Market Value / Book Value Ratio (PD / DD): the concepts in the numerator and denominator are available in our explanation above.

Accordingly, if we divide the market price by the book value (2 TL / 1.1066 TL), we find the PD / DD value of our company 1.807.

Likewise, if we divide the market value of our company by equity (600.000 TL / 332.000), we find the same value. Both give the ratio PD / DD.

So how do we decide what this ratio should be? This may vary depending on your subjective and company perspective. For example, if this company we established is a profit or a loss, if it does not have a regular profitability or if it is constantly making a loss, the market value can be expected to be equal to or close to the book value. However, the market value of a company that makes regular profits and increases its equity constantly cannot be expected to be close to its book value. This value is measured by the concept of return on equity. (Return on equity: Net Profit / Equity) A company with a return on equity of 20% actually means that it has doubled its equity after 5 years. This information is very important. I leave the further to your thinking. It should not be difficult to solve by using your logic without informing why the market prices of companies whose market value is traded at 4, 5 or 6 times the book value by declaring a regular profit in the market.

What does the current PD / DD ratio correspond to in the next year or 5 years or 10 years later? Answering these questions or making predictions about the coming years will cause you to recalculate for this ratio. The estimated PD / DD ratio for the next years is called the Prospective PD / DD ratio. The PD / DD ratio we calculate as of now is called the Historical PD / DD ratio. Now let's say that I think our company we established a year later will make a loss of 60.000 TL. Therefore, my equity capital will have decreased from 332,000 TL to 272,000 TL. Since my company's current market value is 600,000 TL, my company's PD / DD ratio will be 2,205 next year according to the projected profit (600,000 TL / 272,000 TL).

What am I trying to explain? In fact, the current PD / DD ratio (1.807) will increase to 2.205 for next year. In other words, our company will be traded at 2.2 times the book value next year. If you think that you have estimated the equity capital of the next year correctly, you see that the company will be expensive next year and the market price of this company (2 TL) is expensive.

Let's explain from another point of view. Let's say that the company I founded will make an annual net profit of 50,000 TL in the next ten years. What does this mean? 10 years * 50,000 TL = 500,000 TL. If we add this to our current equity (ie 332,000 TL + 500,000 TL = 832,000 TL), we will find our equity capital after 10 years. If we divide the present market value by our equity 10 years later, we find the prospective PD / DD 10 years later. (Prospective PD / DD 10 years later = 600,000 TL (present market value) / 832,000 TL (10 years later equity) = 0.7211) That is, the current PD / DD, which is 1.807 today, will decrease to 0.7211 after ten years. In other words, it means that you have bought a very cheap company today for a 10-year investment. If the book value of the company after 10 years is 832,000 TL, dividing it by the number of shares, you find the book value of the stock ten years later. (2.77 TL). If your E company is a company that is constantly profitable, since the market value of this company will always be more expensive than its book value?

Companies that make steady and stable profits are very important. Imagine putting your money into your deposit today and guess how many years later you will double your money. Think of the PD / DD ratio as well, and predict when your money will double when you invest your money today in a company that makes a steady profit. While making this estimation, the equity profitability ratio will be a kind of guide for you. Of course, what we have explained is formed under various assumptions. How will the economy go in the coming years? How will interest rates increase? What are the political risks? We should not forget that we have to follow them regularly and act according to the conjuncture. Also, if there is a decrease in the profitability of the company, we have to be careful.

Expectations are bought in the stock market and what is realized is sold. Take a company that makes a steady profit and estimate the PD / DD ratio five years from now. E if prospects are bought in the stock market, imagine that the investors in the market buy the next 5 years or 10 years in the next 5 years. This information is long-term, valuable information for those who want to invest in the stock market. Examine the sample table below carefully.

Konya Çimento has made an annual average of 37.4 million TL net profit in the last twelve years. If I were in 2002 and I guess that Konya Cement will make an average annual net profit of 37.4 million TL, I will find a net profit of 37.4 million TL * 12 years = 449 million TL and add it to the equity in 2002 (449 Million TL + 50 Million TL = 500 Million TL). TL), the result I would find would be to divide it by capital. (500 million TL / 4.8 million TL = 104 TL). Therefore, I would have thought that this company would be 104 TL for 2014. Of course, let's not forget one thing, as I explained above, expectations are bought in the stock market. Since I know that investors who will invest in Konya Cement in 2014 will calculate the next 5-year or 10-year price for Konya cement, they will probably set a price above the book value I found, so it should not be difficult to predict that the price of Konya Cement in 2014 will be at least 200 TL.

Although the PD / DD issue is even more detailed, we have included this much in our article here. We have come to the end of our article for this ratio, which is also evaluated in various ways in various combinations.

In our next article, we will talk about PRICE / PROFIT RATE.

## AUTHOR:

Yilmaz Altun

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