Requesting Opinion on Valuation Method

Hi Guys,

I’m interested in valuing a a company’s equity in the marine shipping industry. 40% of capital is debt and the industry is highly cyclical.

The earnings are currently positive but are in decline or trough.

I am unsure if i should use FCFF or FCFE. I’m leaning towards FCFF because although company debt is stable, industry debt levels will fluctuate. Also, i’m not sure if i should be normalizing earnings or doing a multi-stage FCFF.

I checked Damodaran’s website and i’m still not sure…

FCFF with normalized earnings or project the earnings year per year over 2-3 stages towards recovery?


The easiest thing to do is use FCFF over 3-5 projected years and then subract the value of the debt to arrive at equity value. If you use FCFE, you’ll have to make assumptions about principal repayments, refinancings, etc.

Hi Higgmond, thanks for the feedback.

So you wouldn’t normalize the earnings? You would just project out a few years towards stability?

I 2nd FCFF… I believe FCFF is better choice as the marine shipping industry as a whole is generally highly leveraged business

Unless you are also going to use a multiples-based valuation approach, there really is no need to normalize historic earnings. Whether or not you would use normalized projections, or projections that include company-specific nonrecurring or “non-market” items, really depends on what you are using the valuation for. If you are looking at the company as an acquisition target and the acquiror could avoid those items, then you should normalize the projections. If you are looking at the equity as a minority investor with the expectation that those items will be incurred, then you really should leave them in the projections.