great work Brian ! I have an addtional question please: when adding NOLs to Entreprise value at the end of a DCF analysis, should'nt we discount them as well and therefore adding back the PV of NOLs ??
Hey Brian, this is great work. Thanks for sharing! I was wondering if you could help me figure out the stock value of the NOLs that Contexlogic has (2.7 billion). I am having trouble trying to determine the true value of the NOL, can you help out?
Sorry, but we don't offer 1-on-1 help for company analysis in these RUclips comments. Happy to review Excel files, filings, or your own work and provide feedback if you have previously purchased a course or coaching service.
Very clear and insightful video, as always. I have a conceptual question for you: shouldn't the source of the NOLs determine whether you can even include it in the DCF? If, for example, the NOLs include tax deductions for prior interest expense, aren't we being inconsistent by pairing future unlevered FCF with past levered FCF? (i.e. tax on NOPAT versus tax on EBT) We do not add the tax shield of future interest expense in a DCF valuation (assuming we are not running an APV), so why are NOLs treated differently to the future interest tax shield?
Yes, in theory you are correct, but the problem is that it's almost impossible to determine the source of the NOLs because most companies don't disclose that. So in practice, the best you can usually do is to assume that the NOLs apply to any future positive taxable income.
If we continue with your Steel Dynamics example, its pre-tax interest expense for fiscal 2015 was $153 million. The 2015 10K provides changes in NOLs in Note 4. So we know that its NOL balance increased from $33 million in 2014 to $61 million in 2015. In other words, without the interest deduction it is unlikely that Steel Dynamics would have generated an NOL in 2015. At least half (but probably more) of the current NOL balance is attributable to interest.
OK? I'm not sure what your point is. In this specific case, yes, maybe you could make an argument for treating them differently. But in most cases, companies have accumulated NOLs from events far in the past. The point of this tutorial was to explain the basic concept and why it's not a great idea to factor in NOLs the way that some people recommend.
Very nice video, thank you. Just one question: if we add up the tax savings from NOLs at the end, to calculate Implied Equity Value, we get a higher valuation due to the time value of money. Isn't it possible to add the PV of tax savings? This would eliminate the distortion due to the time value of money.
It is possible but extremely time-consuming because you would have to project the company's statements, estimate te taxable income each year, and estimate how much of the NOL can be used each year and when the entire NOL balance runs out... and account for the fact that new NOLs may be created. In the end, you would spend a lot of time on a detail that makes a very small impact in most cases. So it is probably not worth it unless the company's NOL balance is massive or there are other special circumstances.
In a 3-statement model, yes, but this is an Unlevered DCF, which means we ignore the company's capital structure and the net interest expense arising from it. In an Unlevered DCF, therefore, EBIT * (1 - Tax Rate) = NOPAT and we calculate UFCF from there.
Hi, quick question about where to get the NOLs. I am looking at a company that has "Net operating losses carrywards" mentioned under their DTA of $484MM, and then in the explanation right below the table, it says "for federal and state tax reporting purposes we have $2.5B available to reduce future taxable income." When I create the NOL schedule, should I use the loss carrywards under DTAs of $484MM or the $2.5B the company says it has to reduce its future taxes?
The number in the DTA represents approximately Total Net Operating Losses * Tax Rate. The Off-Balance Sheet one represents Total NOLs. So, if you are forecasting NOL usage actively in a projection, use the total number, but remember that the total tax savings from NOLs should equal roughly the on-BS number within the DTA.
If you build a NOL schedule and factor in NOLs over time in DCF, NOLs will increase FCFs and therefore implied EV. But in the video, you rather subtract NOLs from Equity Value, resulting in lower EV. Shouldn't you add it to Equity Value rather than subtracting it? I would greatly appreciate it if you could provide me an explanation. Thanks!
We only subtract NOLs when calculating the Current Enterprise Value starting with the Current Equity Value. That is because NOLs are non-operating assets. Enterprise Value excludes non-operating assets, so you subtract NOLs in the calculation. But NOLs increase a company's *implied* Enterprise Value by reducing the company's tax burden in future years, which boosts its implied value. So it just depends on whether you're calculating the current market value or what you think the company is worth.
There is some debate/disagreement about that, but most people would say WACC if you're valuing an NOL on the basis of future tax savings from it. It would normally be the buyer's WACC in an M&A deal.
@@financialmodeling why WACC? I’ve heard people say cost of equity, in between cost of equity and cost of debt, and even the RF rate, but never WACC. Interested to hear your perspective
@@bromaro NOLs benefit all investors, not just equity or debt investors, because their future usage increases cash flows and makes it easier to pay for interest/principal on a cash basis and issue dividends. But they are only useful if the core business continues to perform well, i.e., generate positive Taxable Income that NOLs can offset.
@@financialmodeling but even if the core business doesn’t do well, wouldn’t you still be able to sell it off (business shuts down) which would only benefit equity investors
@@bromaro If a company sells the entire company, the value of the NOLs will only benefit the shareholders because the lenders just get back their owed principal. But the key question is who benefits from the NOLs while the company is operating as it normally does. You don't normally look at a shutdown scenario to decide on the proper discount rate. And note that NOLs may actually be written down completely in some deals, depending on the structure (especially in asset sales).
Great work Brian. I have two questions 1)What about DTA and DTL that arise due to temporary differences ? should an adjustment me made if they are not built into DCF ? 2) I valued a commercial bank using the adjusted dividend discount model which you have a tutorial on. Although there is no EV for a bank , Tax savings from NOL's should be an add on the equity value from the DDM if the tax savings are not projected explicitly , correct ? Thanks
Thanks for the video, I just have one question. When using the short method all I have to do is take de NOL directly from the DTA breakdown and multiply it by the tax rate (that's how you came out with the 61.1) correct?. This number (61.1) should be the same when doing the long approach and calculate the value of Annual tax savings? thanks
The DTA already lists the total amount * the tax rate (roughly). So you don't multiply by the tax rate again. You can just use the amount in the DTA in the bridge directly. It should roughly equal the expected tax savings over time if you model it out, but won't always be the same due to expirations, tax rate changes, etc.
@@financialmodeling I understand, thank you. another question. when doing DCF valuation, what is the correct treatment for DTA and DTL shown in the balance sheet? or is DTA already included when we calculate NOLs? but how about DTL?
@@jesusalbertoperezdet3771 The DTA and DTL do not factor into the analysis directly, only the NOLs do. Either count the NOLs in the Cash Tax calculation directly in the DCF or include the total NOL balance as a bridge item when calculating Implied Equity Value at the end.
For the more simpler option of subtracting NOL when going from Equity Value to EV, would we need to find the off-balance sheet NOL in the DTA break-down of the annual report? If so are we assuming that NOLs are the only non-operating asset within DTA? Cheers
Dear Team, I want to see all the tutorials right from the scratch (basics), but not the getting the proper list, all the videos are jumbled, please help
There isn't an easy way to do that, but maybe go here and start with Accounting and move up through the other topics sequentially: ruclips.net/user/financialmodelingplaylists
Question: doesnt NOL turn into DTA? what you are doing here is pretty much creating future DTA and adding to EV. If thats the case, shouldnt the DTA value be NOL multiply by company tax rate?
No. NOLs are off-Balance Sheet and reflect the full amount by which the company can offset its taxable income. For example, if the company has $500 in NOLs, it can reduce its taxable income by $500 in the future. The portion in the DTA represents roughly Off-Balance Sheet NOLs * Effective Tax Rate. It represents how much in tax savings the company can realize from the NOLs. So if the tax rate is 20%, the portion of the DTA that corresponds to NOLs would be $100 in this case. If you multiplied the DTA by the tax rate, you would be double counting.
great work Brian !
I have an addtional question please: when adding NOLs to Entreprise value at the end of a DCF analysis, should'nt we discount them as well and therefore adding back the PV of NOLs ??
No, because you only count the NOLs on the company's Balance Sheet as of today's date, or the valuation date, not some future date.
Hey Brian, this is great work. Thanks for sharing! I was wondering if you could help me figure out the stock value of the NOLs that Contexlogic has (2.7 billion). I am having trouble trying to determine the true value of the NOL, can you help out?
Sorry, but we don't offer 1-on-1 help for company analysis in these RUclips comments. Happy to review Excel files, filings, or your own work and provide feedback if you have previously purchased a course or coaching service.
Very clear and insightful video, as always.
I have a conceptual question for you: shouldn't the source of the NOLs determine whether you can even include it in the DCF? If, for example, the NOLs include tax deductions for prior interest expense, aren't we being inconsistent by pairing future unlevered FCF with past levered FCF? (i.e. tax on NOPAT versus tax on EBT)
We do not add the tax shield of future interest expense in a DCF valuation (assuming we are not running an APV), so why are NOLs treated differently to the future interest tax shield?
Yes, in theory you are correct, but the problem is that it's almost impossible to determine the source of the NOLs because most companies don't disclose that. So in practice, the best you can usually do is to assume that the NOLs apply to any future positive taxable income.
If we continue with your Steel Dynamics example, its pre-tax interest expense for fiscal 2015 was $153 million. The 2015 10K provides changes in NOLs in Note 4. So we know that its NOL balance increased from $33 million in 2014 to $61 million in 2015. In other words, without the interest deduction it is unlikely that Steel Dynamics would have generated an NOL in 2015. At least half (but probably more) of the current NOL balance is attributable to interest.
OK? I'm not sure what your point is. In this specific case, yes, maybe you could make an argument for treating them differently. But in most cases, companies have accumulated NOLs from events far in the past. The point of this tutorial was to explain the basic concept and why it's not a great idea to factor in NOLs the way that some people recommend.
Very nice video, thank you.
Just one question: if we add up the tax savings from NOLs at the end, to calculate Implied Equity Value, we get a higher valuation due to the time value of money.
Isn't it possible to add the PV of tax savings? This would eliminate the distortion due to the time value of money.
It is possible but extremely time-consuming because you would have to project the company's statements, estimate te taxable income each year, and estimate how much of the NOL can be used each year and when the entire NOL balance runs out... and account for the fact that new NOLs may be created. In the end, you would spend a lot of time on a detail that makes a very small impact in most cases. So it is probably not worth it unless the company's NOL balance is massive or there are other special circumstances.
Shouldn't taxable income be EBT? Why do we use EBIT?
In a 3-statement model, yes, but this is an Unlevered DCF, which means we ignore the company's capital structure and the net interest expense arising from it. In an Unlevered DCF, therefore, EBIT * (1 - Tax Rate) = NOPAT and we calculate UFCF from there.
Hi, quick question about where to get the NOLs. I am looking at a company that has "Net operating losses carrywards" mentioned under their DTA of $484MM, and then in the explanation right below the table, it says "for federal and state tax reporting purposes we have $2.5B available to reduce future taxable income." When I create the NOL schedule, should I use the loss carrywards under DTAs of $484MM or the $2.5B the company says it has to reduce its future taxes?
The number in the DTA represents approximately Total Net Operating Losses * Tax Rate. The Off-Balance Sheet one represents Total NOLs. So, if you are forecasting NOL usage actively in a projection, use the total number, but remember that the total tax savings from NOLs should equal roughly the on-BS number within the DTA.
If you build a NOL schedule and factor in NOLs over time in DCF, NOLs will increase FCFs and therefore implied EV. But in the video, you rather subtract NOLs from Equity Value, resulting in lower EV. Shouldn't you add it to Equity Value rather than subtracting it? I would greatly appreciate it if you could provide me an explanation. Thanks!
We only subtract NOLs when calculating the Current Enterprise Value starting with the Current Equity Value. That is because NOLs are non-operating assets. Enterprise Value excludes non-operating assets, so you subtract NOLs in the calculation. But NOLs increase a company's *implied* Enterprise Value by reducing the company's tax burden in future years, which boosts its implied value. So it just depends on whether you're calculating the current market value or what you think the company is worth.
What discount rate to use for NOLs, and if one company were to buy another company’s NOLs
There is some debate/disagreement about that, but most people would say WACC if you're valuing an NOL on the basis of future tax savings from it. It would normally be the buyer's WACC in an M&A deal.
@@financialmodeling why WACC? I’ve heard people say cost of equity, in between cost of equity and cost of debt, and even the RF rate, but never WACC. Interested to hear your perspective
@@bromaro NOLs benefit all investors, not just equity or debt investors, because their future usage increases cash flows and makes it easier to pay for interest/principal on a cash basis and issue dividends. But they are only useful if the core business continues to perform well, i.e., generate positive Taxable Income that NOLs can offset.
@@financialmodeling but even if the core business doesn’t do well, wouldn’t you still be able to sell it off (business shuts down) which would only benefit equity investors
@@bromaro If a company sells the entire company, the value of the NOLs will only benefit the shareholders because the lenders just get back their owed principal. But the key question is who benefits from the NOLs while the company is operating as it normally does. You don't normally look at a shutdown scenario to decide on the proper discount rate. And note that NOLs may actually be written down completely in some deals, depending on the structure (especially in asset sales).
Great work Brian. I have two questions
1)What about DTA and DTL that arise due to temporary differences ? should an adjustment me made if they are not built into DCF ?
2) I valued a commercial bank using the adjusted dividend discount model which you have a tutorial on. Although there is no EV for a bank , Tax savings from NOL's should be an add on the equity value from the DDM if the tax savings are not projected explicitly , correct ?
Thanks
1) No, generally not, because temporary differences get reversed quickly and barely make an impact in most cases.
2) Yes.
Thanks for the video, I just have one question. When using the short method all I have to do is take de NOL directly from the DTA breakdown and multiply it by the tax rate (that's how you came out with the 61.1) correct?. This number (61.1) should be the same when doing the long approach and calculate the value of Annual tax savings? thanks
The DTA already lists the total amount * the tax rate (roughly). So you don't multiply by the tax rate again. You can just use the amount in the DTA in the bridge directly. It should roughly equal the expected tax savings over time if you model it out, but won't always be the same due to expirations, tax rate changes, etc.
@@financialmodeling I understand, thank you. another question. when doing DCF valuation, what is the correct treatment for DTA and DTL shown in the balance sheet? or is DTA already included when we calculate NOLs? but how about DTL?
@@jesusalbertoperezdet3771 The DTA and DTL do not factor into the analysis directly, only the NOLs do. Either count the NOLs in the Cash Tax calculation directly in the DCF or include the total NOL balance as a bridge item when calculating Implied Equity Value at the end.
For the more simpler option of subtracting NOL when going from Equity Value to EV, would we need to find the off-balance sheet NOL in the DTA break-down of the annual report? If so are we assuming that NOLs are the only non-operating asset within DTA? Cheers
Yes and yes.
Would having a large NOL ever impact the Tax Rate used in a WACC calculation?
No, probably not, because NOLs eventually get used up, and WACC is supposed to represent the tax rate into perpetuity.
Dear Team,
I want to see all the tutorials right from the scratch (basics), but not the getting the proper list, all the videos are jumbled, please help
There isn't an easy way to do that, but maybe go here and start with Accounting and move up through the other topics sequentially: ruclips.net/user/financialmodelingplaylists
Question: doesnt NOL turn into DTA? what you are doing here is pretty much creating future DTA and adding to EV. If thats the case, shouldnt the DTA value be NOL multiply by company tax rate?
No. NOLs are off-Balance Sheet and reflect the full amount by which the company can offset its taxable income. For example, if the company has $500 in NOLs, it can reduce its taxable income by $500 in the future.
The portion in the DTA represents roughly Off-Balance Sheet NOLs * Effective Tax Rate. It represents how much in tax savings the company can realize from the NOLs. So if the tax rate is 20%, the portion of the DTA that corresponds to NOLs would be $100 in this case.
If you multiplied the DTA by the tax rate, you would be double counting.