Challenges in Determining Company Value in Türkiye

Company valuation is not merely a simple comparison of the assets and liabilities on a firm’s balance sheet. Valuation requires a joint analysis of the cash flows the company is expected to generate in the future, its growth capacity, operating risks, financing structure, and competitive strength. In Türkiye, economic fluctuations, high inflation, interest-rate and exchange-rate uncertainty, difficulty in accessing sector data, and an insufficiently developed financial-planning culture make the valuation process more complex.

The first difficulty is that financial statements are composed of amounts with different purchasing power. High inflation makes direct comparison of past sales, costs, inventories, depreciation, and working-capital data harder. Inflation adjustment under TAS 29 and BOBI FRS Section 25 brings the financial statements closer to purchasing power at the reporting date, but it does not of itself move assets to market value. The inflation-adjusted cost of a machine may differ from the machine’s fair value. Inflation adjustment and market valuation must therefore be kept distinct.

In the discounted cash-flow method, the core problem is estimating future free cash flows reliably. Free cash flow to the company (FCFF) is generally calculated as follows:

FCFF = EBIT × (1 − Tax Rate) + Depreciation − Capital Expenditure − Increase in Net Working Capital

In Türkiye, sales prices, wages, energy costs, interest rates, and exchange rates can change materially over short periods, so each element in the formula must be modelled separately. It is not enough to increase sales only by past inflation. Sales volume, product price, capacity utilisation, the export share, and customer losses must be forecast as separate assumptions. Capital expenditure should not be assumed equal to depreciation; maintenance investment that preserves existing capacity and capacity-expanding investment that supports growth must be calculated separately.

Estimating the net working-capital requirement as a fixed percentage of sales can also be misleading. In a sounder approach, receivables, inventories, and trade payables are calculated from operating cycle days:

Receivables = Credit Sales × Collection Period / 365

Inventories = Cost of Goods Sold × Inventory Holding Period / 365

Trade Payables = Credit Purchases × Payment Period / 365

Especially in high-inflation periods, growing sales require more financing of receivables and inventories. A company that appears profitable may therefore generate negative free cash flow because of its working-capital need.

Another difficulty is determining the weighted average cost of capital:

WACC = Ke × E/(D + E) + Kd × (1 − T) × D/(D + E)

Here the cost of equity is generally estimated as follows:

Ke = Risk-Free Rate + Beta × Market Risk Premium + Country Risk Premium + Company-Specific Risk Premium

In Türkiye, the risk-free rate, the country risk premium, and borrowing costs can change rapidly. The policy rate cannot be used directly as the WACC. The company’s true borrowing cost must be determined in light of maturity, collateral, credit quality, and the currency of the debt. Because beta cannot be calculated directly for unlisted companies, the betas of comparable listed companies are unlevered and then relevered according to the target capital structure of the company being valued.

Consistency of currency and inflation between cash flows and the discount rate must also be ensured. Nominal Turkish-lira cash flows must be discounted at a nominal Turkish-lira discount rate, and real cash flows at a real discount rate:

1 + Real Rate = (1 + Nominal Rate) / (1 + Expected Inflation)

Terminal value is also an important source of uncertainty:

Terminal Value = FCFFₙ₊₁ / (WACC − Perpetual Growth Rate)

Bringing the perpetual growth rate excessively close to the WACC inflates company value artificially. Growth, investment, margin, and working-capital assumptions in the terminal period must therefore be sustainable.

Finding comparable companies in the market-multiples method is also difficult. Company value is generally calculated as:

Company Value = Adjusted EBITDA × Appropriate EV/EBITDA Multiple

One-off income and expenses, related-party transactions, owner compensation, and extraordinary costs must, however, be normalised. In the final step, net financial debt and debt-like obligations are deducted from company value to arrive at equity value.

In Türkiye, company valuation should not be concluded on the basis of a single method and a single figure. Discounted cash flows, market multiples, and the net-asset approach should be used together; assumptions for WACC, growth, operating margins, the exchange rate, and working capital should be tested through sensitivity analysis.