What lies beneath the number?
The concept of business value and its five layers – from cash flows to intangible capital.
Rolandas Rakštys · Lecturer · Vytautas Magnus University, Agriculture Academy · Faculty of Bioeconomy Development, Department of Business and Rural Development · [email protected] · ORCID 0000-0003-0299-9930
Chapter 1 “Foundations of Business Value”, section 1.1.2 · English translation of v0.16.5 (2026-10-15) · set v1.0.2 · 15 slides, ≈ 31 min
Rakštys, R. (2026). Chapter 1. Foundations of Business Value (English translation of v0.16.5, 2026-10-15). Verslo planavimas ir vertinimas [Business planning and evaluation]. Vytautas Magnus University, Agriculture Academy. https://rakstys.eu/studijos/verslo-planavimas-ir-vertinimas/en/skyriai/ch01/ · CC BY-NC-ND 4.0
Why are two companies with identical cash flows valued differently?
There is no single universal definition
Business value – the risk-adjusted present value, at a given date t, of the future economic benefits (cash flows above all) that a company is able to generate for its capital providers, taking into account:
Layer 3? Perception is not in the definition – it appears when we ask why market price deviates from value.
The basic expression of value
You will calculate it in the trainer for section 1.2 – formula (1.1).
Four notions, three distinctions
Value ≠ price
Price – the actual outcome of a transaction or a market quotation; value – an estimate on a basis of value and assumptions (Damodaran, 2012).
IFRS 13: fair value – an exit price (IFRS Foundation, 2013). International Valuation Standards (IVS): market value – the estimated amount of an exchange (IVSC, 2022).
“Price is what you pay; value is what you get.”
Graham’s lesson, as quoted by Buffett (Buffett, 2009)Value ≠ performance
Performance – a set of financial and non-financial indicators already achieved, oriented to a shorter horizon: revenue, return on assets, market share.
Value – the present expression of the entire future economic potential.
The Balanced Scorecard emerged because financial indicators alone can mislead (Kaplan & Norton, 1992).
Value ≠ profitability
Profitability – the ratio of an accounting result to a base (revenue, assets, equity). A profitable company may destroy value if its return falls short of the cost of capital.
EVA = NOPAT − (IC × WACC)economic value added (EVA); net operating profit after taxes (NOPAT); invested capital (IC); weighted average cost of capital (WACC)
Click a card, then the column it belongs to.
Questions the formula does not cover
The ontological approach asks what exists in the value system and what its fundamental components are.
Five layers
Click a layer
You will see what exists in it.
Groth et al., 1996; Walters, 1997; Lepak et al., 2007; Crouzet et al., 2022
The core
Cash flows
Free cash flow to the firm (FCFF) and to equity (FCFE) – the principal “carrier” of value under the income approach.Tangible assets
Real estate, equipment, inventory, financial assets. The asset-based approach deducts liabilities and establishes a minimum (liquidation) value.Capital structure
The mix of debt and equity determines the WACC. Modigliani and Miller (1958): irrelevant under ideal conditions; in practice – the tax shield, bankruptcy costs, agency conflicts.The core is the quantitative base on which all the other layers are built. Its objects are, in principle, observable and measurable with the instruments of accounting and financial analysis.
Risk
Systematic risk
Market risk that cannot be diversified away, measured by the beta coefficient in the Capital Asset Pricing Model (CAPM; Sharpe, 1964).Specific risk
Factors particular to the individual company: technological, regulatory and operating risk.Discount rate
Restates future cash flows to present value: the time value of money and a risk premium.Risk
Probabilities are known or can be reasonably assessed – it is possible to calculate.
Uncertainty
The structure of probabilities is unknown or unstable – one can only reason through scenarios.
Frank Knight’s distinction (Knight, 1921; Alfaro et al., 2024). Standard DCF and CAPM models assume risk.
This is where valuation first becomes distinctly subjective: the choice of discount rate involves a substantial element of expert judgement.
Perception
George Akerlof’s “lemons” model – adverse selection (Akerlof, 1970)
In valuation practice: liquidity discounts, wider bid-ask spreads and an information risk premium for insufficient transparency.
The strategic layer
Competitive advantage
Returns above the cost of capital through entry barriers, switching costs, network effects, proprietary resources (Porter, 1985; Barney, 1991).Strategic positioning
The place in the value chain: differentiation, cost leadership, focus on a niche.Real options
The right, but not the obligation, to expand, contract, defer or abandon investments; a standard DCF undervalues flexibility (Phelan, 1997).Dynamic capabilities
Sensing opportunities, seizing them and reconfiguring the resource base (Teece, 2007).Equity may be read as a call option on the company’s assets with an exercise price equal to the value of its debt (Merton, 1974; for detail see Chapter 14).
Five channels (Walters, 1997; Kim, 2004)
Strategic variables may determine value even where their short-term accounting effect is weak.
The intangible layer
Intellectual property
patents, copyrights, trade secrets (IP)Brand equity
willingness to pay a premium for a known brandHuman capital
knowledge, skills, experience (Gamerschlag, 2013)Data assets
exclusivity, quality, rights (Hughes-Cromwick & Coronado, 2019; Corrado et al., 2022)often fails the criteriaOrganisational capital
routines, processes, culture, management systemsoften fails the criteriaCustomer capital
retention rate, customer lifetime value (CLV), switching costsIAS 38: only identifiable and reliably measurable assets go on the balance sheet.
In the digital economy, selling and marketing expenditure often accounts for 20 % or more of revenue – this is investment in customer capital. That is why subscription and SaaS (software as a service) business models are valued at higher multiples.
Intangible assets accounted for 92 % of the market capitalisation of the S&P 500 at the end of 2025 (2020–2025: about 90 %). A single provider’s estimate (Ocean Tomo, 2025).
Not boxes but a system
Examples from the chapter: a technological shock, a shift in market mood, a capital structure crisis.
Value is an organised relation
The answer to the opening question: two companies with identical cash flows differ in the other layers – risk, perception, strategy, intangible capital.
References
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Rakštys, R. (2026). Chapter 1. Foundations of Business Value (English translation of v0.16.5, 2026-10-15). Verslo planavimas ir vertinimas [Business planning and evaluation]. Vytautas Magnus University, Agriculture Academy. https://rakstys.eu/studijos/verslo-planavimas-ir-vertinimas/en/skyriai/ch01/ · CC BY-NC-ND 4.0
These slides are based on the textbook Verslo planavimas ir vertinimas [Business Planning and Evaluation]. The text was translated, structured and visually laid out with the help of artificial intelligence tools (Claude), following the protocol for working with AI and the verification procedures set by the author.