Illustration for this hypothetical case study
The hypothetical company in this series has returned to net profit of THB 1.52 million. Over the same period, however, it spent THB 480,000 more cash on operations than it collected, and its outstanding bank debt is THB 6.20 million. I will connect these three facts before valuing it. A recovery in profit does not turn receivables into cash or erase loan terms.
The company, figures, and periods A/B in this part are constructed learning examples, not the statements or history of any business. THB 1 million a year in subscription revenue is a starting premise; it does not guarantee renewal or future cash. Amounts exclude VAT unless stated otherwise.
This follows the business model, software rights, and subscription costs discussed in the previous three parts. It values the continuing business at the end of hypothetical period B, using year-end, after-tax cash flows in nominal THB, with price effects included under the assumptions, and a consistent discount rate. Periods A/B are newly constructed, not calendar years or any company's history.
Three valuation cases before the calculations
The base case gives enterprise value, or EV, of about THB 23.33 million and equity value of about THB 21.83 million. The downside and stronger-growth cases change several conditions (see “scenario assumptions”). All are model outputs for the same hypothetical company, not appraisals of a real business.
| Case | Operating EV | Add excess cash | Less bank debt | Equity value |
|---|---|---|---|---|
| Downside | 11.446 | 4.700 | 6.200 | 9.946 |
| Base | 23.330 | 4.700 | 6.200 | 21.830 |
| Stronger growth | 37.455 | 4.700 | 6.200 | 35.955 |
All three cases start with the same cash and debt at the valuation date, so the net subtraction from EV is THB 1.50 million in each. The THB 9.946–35.955 million outputs reflect the chosen scenarios. They are neither a confidence interval nor offer prices, and should not be averaged without a reason.
Why does the base case differ from the earlier THB 19.92 million figure?
The roughly THB 19.92 million figure came from an earlier simplified model with total revenue of THB 16 million. This version builds a new A/B case: THB 16 million in core revenue including subscriptions, plus THB 800,000 in continuing ancillary services, for THB 16.80 million total. It also changes costs, receivables, deposits, and debt obligations as a connected set. This compares two model versions, not a rise in one company's price over time.
| Item | Earlier version | Current version | Difference |
|---|---|---|---|
| EV from projected cash flow | 19.612 | 23.330 | +3.718 |
| Excess cash less bank debt | +0.308 | −1.500 | −1.808 |
| Equity value | 19.920 | 21.830 | +1.910 |
EV rises by about THB 3.718 million because of the new revenue, cost, investment, and working-capital projections. But the excess-cash-and-debt bridge reduces value by another THB 1.808 million compared with the earlier version, leaving an increase of about THB 1.910 million in equity value. The earlier version had THB 808,000 in excess cash and THB 500,000 of debt; this version has THB 4.70 million and THB 6.20 million, respectively.
Although EBITDA moves from THB 2.59 million to THB 3.50 million and EBIT from THB 2.11 million to THB 2.70 million, net profit falls from THB 1.648 million to THB 1.52 million because assumed interest rises from THB 50,000 to THB 800,000. Cash flow does not improve with reported profit: base-period FCFF shifts from positive THB 1.048 million to negative THB 240,000 as working capital and operating deposits increase in this version. EV rests on future projections, with collection and investment still to prove.
The comparison retains a 14% base-case WACC, 3% long-run growth, and 15% return on incremental investment. It adds no special premium for the word AI and does not lower the discount rate on claims about strengths.
Connect the end of period A to the end of period B
The income statement in part 1 shows a THB 3.60 million net loss in A and a THB 1.52 million net profit in B. The next table shows the connected balance sheets at the end of those periods. It does not show an opening balance sheet or cash flow for A, so we cannot say which activities produced cash at the end of A. For B, we can connect the ending balances from A to those in B.
| Item | End of A | End of B |
|---|---|---|
| Cash | 8,200,000 | 6,200,000 |
| Trade receivables | 1,500,000 | 4,000,000 |
| Supplier prepayments | 1,500,000 | 2,000,000 |
| Net equipment | 2,600,000 | 2,000,000 |
| Long-term operating deposits | 800,000 | 1,000,000 |
| Total assets | 14,600,000 | 15,200,000 |
| Operating payables | 1,800,000 | 2,000,000 |
| Accrued expenses | 500,000 | 500,000 |
| Project advances received | 1,000,000 | 1,000,000 |
| Long-term warranty provision | 500,000 | 500,000 |
| Current portion of bank loans | 1,820,000 | 1,700,000 |
| Noncurrent portion of bank loans | 5,500,000 | 4,500,000 |
| Total liabilities | 11,120,000 | 10,200,000 |
| Equity | 3,480,000 | 5,000,000 |
| Total liabilities and equity | 14,600,000 | 15,200,000 |
Net equipment at the end of B is THB 2 million: THB 2.60 million carried forward, plus THB 200,000 invested in equipment, less THB 800,000 depreciation. A decline in net assets therefore does not mean the company invested nothing. Equity rises from THB 3.48 million by THB 1.52 million of net profit to THB 5 million, assuming no dividend or capital increase during B. Research and maintenance expenses have not been turned into additional IP assets to raise the reported asset total.
| Item | Cash increase or decrease | Connection |
|---|---|---|
| Net profit | 1,520,000 | Start of the indirect method |
| Add depreciation | 800,000 | Already included in operating expenses |
| Increase in receivables | −2,500,000 | 4,000,000 − 1,500,000 |
| Increase in supplier prepayments | −500,000 | 2,000,000 − 1,500,000 |
| Increase in operating payables | 200,000 | 2,000,000 − 1,800,000 |
| Accrued expenses, project advances received, and warranty obligations | 0 | Assumed balances unchanged |
| Cash from operations (CFO) | −480,000 | 1,520,000 + 800,000 − 2,500,000 − 500,000 + 200,000 |
| Equipment investment | −200,000 | Investing activity in the model |
| Additional operating deposits placed | −200,000 | Classified as investing activity in this analytical table |
| Total investing cash flow | −400,000 | Cannot be inferred from the decline in net equipment alone |
| Net reduction in bank-loan principal | −1,120,000 | 7,320,000 − 6,200,000; no dividend or capital increase |
| Net change in cash | −2,000,000 | −480,000 − 400,000 − 1,120,000 |
| Cash at end of B | 6,200,000 | Carried forward 8,200,000 − decrease of 2,000,000 |
Read cash, receivables, and total liabilities separately
At the end of B, current assets of THB 12.20 million consist of cash of THB 6.20 million, receivables of THB 4 million, and supplier prepayments of THB 2 million. Subtracting receivables from current assets gives THB 8.20 million, but that still includes prepayments; it cannot stand in for cash. Total liabilities are THB 10.20 million, of which only THB 6.20 million is bank debt. The rest is operating obligations shown in the table.
Viewed through receipts and payments in B, the model has THB 14.30 million collected from customers and THB 13.60 million paid for costs and expenses before interest and tax. After paying THB 800,000 interest and THB 380,000 tax, CFO is negative THB 480,000. Accounting expenses before depreciation differ from cash paid because of receivables, prepayments, payables, and accrued balances. Profit alone cannot tell us the cash position [IAS 7]
From profit and cash to FCFF, without deducting costs twice
FCFF is free cash flow for all capital providers, before separating debt from equity financing. Start with EBIT of THB 2.70 million and apply the assumed 20% tax rate to get net operating profit after tax, or NOPAT, of THB 2.16 million. Add THB 800,000 depreciation, subtract THB 200,000 of equipment investment, THB 2.80 million of additional operating working capital, and another THB 200,000 in operating deposits. That gives negative THB 240,000 in FCFF for period B. Depreciation is already included in THB 7.10 million of operating expenses, so it is not deducted again before starting from EBIT.
Operating working capital as defined for this model equals receivables plus supplier prepayments, less payables, accrued expenses, project advances received, and the warranty provision, including its long-term obligation. It is therefore not simply current assets less current liabilities. The balance is negative THB 800,000 at the end of A and THB 2 million at the end of B, requiring THB 2.80 million more cash. It excludes cash, bank debt, equipment, and the separately deducted deposits.
CFO in B is negative THB 480,000. Subtract THB 200,000 equipment investment and THB 200,000 additional deposits to get negative THB 880,000 after investment. Adding back after-tax interest of 800,000 × (1 − 20%) = THB 640,000 brings us to FCFF of negative THB 240,000. That difference reflects financing, not new profit. Do not deduct the THB 2.80 million working-capital increase again from CFO, which already reflects those balance changes.
The THB 1,200,000 research expense remains in operating expenses and has already reduced NOPAT. It is not added back simply because the work may create IP, and it is not deducted a second time as investment. If actual development spending is capitalized, investment and amortization must be reconciled with that accounting framework. Analytical reclassification creates no new cash [Damodaran on intangible assets and value]
Build the forecast from customers and costs before discounting
The base case assumes project and ancillary-service revenue grow 8% a year. It retains 90% of existing-cohort subscription revenue before new purchases, then adds new ARR of THB 300,000, 400,000, 500,000, 600,000, and 700,000 in successive years. Every new and renewed contract is assumed to start January 1, be paid, and provide service for a full year. Only under those conditions do ARR, subscription revenue, and subscription cash receipts match in the same year. Ancillary services are continuing work with costs in the plan, not a hidden extra return or subscription stream.
Direct project costs are 6.40 ÷ 15, or about 42.67% of project revenue. Direct subscription costs are 25%, and ancillary-service costs 43.75%, of their respective revenues. Operating expenses before depreciation fall from 37.5% to 35.5% of total revenue over five years. Depreciation is 0.80 ÷ 16.80 of total revenue, while new equipment investment is set at 6% of total revenue. The THB 200,000 invested during B is not assumed adequate to support growth forever.
| Year | Total revenue | NOPAT | Depreciation | Equipment investment | Increase in operating working capital | Additional deposits | FCFF |
|---|---|---|---|---|---|---|---|
| 1 | 18.264 | 2.364 | 0.870 | 1.096 | 0.218 | 0.087 | 1.833 |
| 2 | 19.909 | 2.681 | 0.948 | 1.195 | 0.245 | 0.098 | 2.092 |
| 3 | 21.735 | 3.045 | 1.035 | 1.304 | 0.272 | 0.109 | 2.395 |
| 4 | 23.745 | 3.456 | 1.131 | 1.425 | 0.299 | 0.120 | 2.744 |
| 5 | 25.939 | 3.917 | 1.235 | 1.556 | 0.327 | 0.131 | 3.139 |
The forecast ties receivables, supplier prepayments, payables, accrued expenses, project advances, and deposits to total revenue at end-of-B proportions. The warranty provision stays at THB 500,000. Assumed warranty costs and payments offset each other and are already included in the inspection and customer support budget, so this obligation is neither added back nor deducted again as borrowing. A falling operating-expense ratio also needs a plan for staffing, reusable work, and quality; lowering the percentage simply to raise value is not enough.
Projected operating cash flows over five years
- Year 1: THB 1.833 million
- Year 2: THB 2.092 million
- Year 3: THB 2.395 million
- Year 4: THB 2.744 million
- Year 5: THB 3.139 million
FCFF moves from negative THB 0.24 million in B to about positive THB 1.833 million in the plan's first year because working capital is assumed to rise by only about THB 0.218 million, versus THB 2.80 million in B, even while first-year equipment investment rises to about THB 1.096 million. Maintaining the forecast ratios for receivables and other operating balances therefore matters greatly. If collection or those terms fail, cash flows and value must be revised; revenue growth alone does not make cash improve.
Interest and principal need a supporting cash plan
Hypothetical period B includes THB 800,000 interest. The forecast instead applies 12% a year to average bank debt and reduces net principal by THB 500,000 each year. That is an assumption, not a market rate. In year 1, debt falls from THB 6.20 million to THB 5.70 million, producing THB 714,000 interest. This can differ from B without retroactively changing B's interest.
The model holds the current bank-loan portion at THB 1.70 million each year. It therefore assumes that a THB 1.20 million credit line can be renewed continuously and that the loan remains classified as planned. That is equivalent to drawing THB 1.20 million and repaying THB 1.70 million of principal, leaving a net THB 500,000 reduction. The net figures in the analytical table do not replace a full presentation of gross borrowing cash flows. The ability to renew must still be tested against lender terms.
Value beyond year 5 still requires investment
After year 5, assume the business reaches 3% long-run growth and a 15% analytical return on incremental investment. It must therefore reserve 3% ÷ 15% = 20% of NOPAT for added investment. That amount covers net continuing needs for equipment, working capital, and long-term deposits after research expensed in operations. The terminal formula does not deduct deposits a second time or assume that the same software version lasts forever.
| Item | Amount or formula |
|---|---|
| Year 5 NOPAT | 3,917,361.10 |
| Year 6 NOPAT | 4,034,881.94 = year 5 × 1.03 |
| Additional net investment in year 6 | 806,976.39 = year 6 NOPAT × 20% |
| Year 6 FCFF | 3,227,905.55 |
| Assumed WACC | 14% |
| Terminal value at end of year 5 | 29,344,595.90 = year 6 FCFF ÷ (14% − 3%) |
Year 6 FCFF is THB 3,227,906, higher than THB 3,138,962 in year 5. Year 6 NOPAT grows 3%, while 20% is set aside for net investment versus about 19.87% in year 5. That transition needs testing against actual customer retention and continued investment. Do not simply multiply year 5 FCFF by 1.03 while ignoring replenishment, or call the 15% assumption a historical ROIC calculated from accounting IP balances.
Discount, then separate enterprise and equity value
Discount each year-end FCFF using an assumed 14% weighted average cost of capital (WACC). The present value of five years of FCFF is THB 8,089,120; the post-forecast portion is THB 15,240,664. Together they give operating enterprise value, or EV, of about THB 23,329,784. These cash flows include the stated project, subscription, and ancillary-service work and its costs. No separate IP or recurring-revenue value is added.
Cash at the end of B is THB 6.20 million. The model assumes THB 1.50 million must be reserved for operations, leaving THB 4.70 million of excess cash in the value bridge. That reserve must be tested against a monthly cash budget, collection dates, payroll, AI costs, and disruptions. It is not a standard percentage of revenue. Prepayments and operating deposits are not excess cash. The THB 6.20 million bank debt is assumed close to market value; it is not the THB 10.20 million in total liabilities.
The bridge therefore adds THB 4.70 million of excess cash at the valuation date and subtracts THB 6.20 million bank debt only once. Payables, accrued expenses, project advances, and warranty obligations already in working capital are not deducted again as borrowings. Cash accumulated in future years is not added to today's value again. The model has no leases, noncontrolling interests, preferred shares, or conversion rights. A real case with any of these must adjust its scope.
About 65.33% of base-case EV comes from present value beyond year 5. That share shows how heavily the answer depends on long-run assumptions about retention, costs, and investment. It is not a success rate or guaranteed return.
Value that depends on cash flows after year 5
- Discounted FCFF in the first five years: THB 8.089 million
- Discounted value after year 5: THB 15.241 million
How value changes when assumptions change
| Condition | Downside | Base | Stronger growth |
|---|---|---|---|
| Annual growth in project and ancillary-service revenue | 0% | 8% | 12% |
| GRR | 75% | 90% | 95% |
| New ARR relative to base plan | Half | Same as base | 1.5 times |
| Direct subscription costs as a share of revenue | 40% | 25% | 20% |
| WACC | 18% | 14% | 12% |
| Long-run growth / return on incremental investment | 2% / 12% | 3% / 15% | 3% / 18% |
| Equity value (THB millions) | 9.946 | 21.830 | 35.955 |
All three cases keep the described project and ancillary-service cost ratios, expenses before depreciation, depreciation, investment, and working-capital formulas. They do not test every risk, such as labor costs that cannot fall as quickly as revenue. Equity values from THB 9.946 million to THB 35.955 million are outputs of the combined assumptions, not a confidence interval or offer prices. There is no automatic reason to weight all three equally.
Equity value under combined changes in assumptions
- Downside: THB 9.946 million
- Base: THB 21.830 million
- Stronger growth: THB 35.955 million
Test the cash left if collection slows and the credit line cannot be renewed
A DCF can give a positive operating value while the business struggles to pay on time. I therefore run a separate single-period liquidity test. At the end of year 1, assume receivables are collected THB 3.50 million more slowly than in the base case, project advances at year-end fall from the base balance to zero, and a THB 1.20 million credit line cannot be renewed, requiring that much additional principal repayment.
| Item | Cash or difference |
|---|---|
| Year 1 ending cash, base case | 6,961,902.86 |
| Collection slower than base case | −3,500,000.00 |
| Project advances below base case | −1,087,142.86 |
| Assumed credit-line renewal fails; additional principal repayment | −1,200,000.00 |
| Cash after hypothetical events | 1,174,760.00 |
| Assumed minimum cash budget | 1,500,000.00 |
| Shortfall against minimum cash | 325,240.00 |
Cash remaining is THB 1,174,760, which is THB 325,240 below the assumed THB 1.50 million minimum cash budget. The example delays collection and changes financing; it does not recognize more revenue or immediately record a receivables loss. It still assumes unchanged year 1 interest and tax. Default, additional interest, or effects on the next year's service would need further analysis. This one-period bridge does not replace the whole-company DCF.
Consider IP separately without adding it on top
The relief-from-royalty method estimates the benefit of owning a right from comparable royalties avoided, then discounts them for the right's life and risk. It requires a defined right and relevant revenue base. It does not treat all project or AI-service revenue as arising from a single right [WIPO on technology valuation and licensing]
This example adds assumptions: 50% of subscription-package revenue relates to the specified technology right; the other 50% is service and hosting. Apply an assumed 5% royalty only to the rights-related base, after assumed 20% tax, and discount at 18% over a hypothetical five-year economic life. There is no terminal value or additional amortization tax benefit. The 50% split is not a TFRS 15 price allocation, and 5% is not a market royalty rate.
| Year | Package revenue | Rights base, 50% | After-tax savings, 5% × 80% |
|---|---|---|---|
| 1 | 1,200,000 | 600,000 | 24,000.00 |
| 2 | 1,480,000 | 740,000 | 29,600.00 |
| 3 | 1,832,000 | 916,000 | 36,640.00 |
| 4 | 2,248,800 | 1,124,400 | 44,976.00 |
| 5 | 2,723,920 | 1,361,960 | 54,478.40 |
The present value of the five years of hypothetical savings is THB 110,908.61. This is an illustration of the method, not an evidence-backed IP appraisal. This case assumes that a licensee would bear the same maintenance obligations as the owner, so there is no incremental maintenance-cost difference. If a comparable license bundles different services or the software needs more updates, the base and obligations must be made comparable before real use.
Do not add this amount to the THB 21.830 million equity value: the business DCF already includes product benefits and related costs. A separate rights value answers a narrower question than enterprise value. Check the technology's life, scope of rights, and royalty evidence before using it in a decision [Damodaran on valuing intangible assets]
Multiples can prompt questions, but require truly comparable companies
For illustration, applying assumed EV/EBITDA multiples of 4, 6, and 8 to period B EBITDA of THB 3.50 million gives EV of THB 14, 21, and 28 million. Adding THB 4.70 million excess cash and subtracting THB 6.20 million bank debt gives equity values of THB 12.50, 19.50, and 26.50 million. These multiples are explanatory assumptions, not observed software-house transaction prices, and their outputs are not added to the DCF.
If DCF and multiples diverge, return to growth, cost, and collection assumptions and seek comparables with similar work and risk. Here subscriptions represent about 5.95% of total THB 16.80 million revenue. Using a fast-growing subscription company's revenue multiple for all revenue needs more support than the word AI on the website. A return to profit after losses also requires checking how much cash and continuing investment it takes to sustain.
Where do technical skill, AI, and project completion affect value?
If a company says its strengths are technical excellence, AI capability, and closing work, I would ask where those strengths appear in customer acceptance, costs paid, and cash collected. In this case study they are factors to verify, not confirmed performance or outcomes of a real business.
“Closing work” needs a definition: closing a sale secures a contract or order, while delivering and closing a project requires acceptance, resolution of outstanding work, and collection under the agreement. A signed contract alone does not ensure delivery within budget or full payment.
| Claimed strength | Evidence to examine | Model assumption to revisit |
|---|---|---|
| Technical skill and delivery quality | On-time acceptance rate with the total number of projects; rework hours; post-delivery defects; and service-level agreement (SLA) results, separated by work type and project-start cohort | Labor hours, rework cost, warranty obligations, acceptance dates, and collections; test whether results persist when key people are absent |
| AI works in practice | Work that meets quality criteria and is accepted by an accountable person, compared with total API, retry, review, rework, security, and operations costs per accepted job | Unit costs, delivery capacity, and support budget; keep human approval and quality checks before claiming savings |
| Consistent sales closing | Number and value of opportunities won divided by opportunities with a decided outcome in the same period, split by start cohort, channel, project size, sales cycle, and profit after delivery | New project revenue, selling costs, and timing of work; do not treat all proposals as certain revenue |
| Delivery followed by collection | Contracts, acceptance evidence, outstanding work, disputes, receivables aging, and actual receipts after invoicing | Collection dates, working capital, outstanding obligations, and liquidity plan; separate wins from cash collected |
| Returning customers and reusable work | Repeat purchases, renewals, and churn by customer start cohort; time spent reusing components versus building anew; code rights, licenses, and maintenance costs | GRR, new work, labor hours, and development budget; verify rights to reuse with other customers before claiming IP benefits |
| A team that can continue without one owner | Manuals, successors, system access rights, handover test records, and owner replacement costs | Retention costs, delivery capacity, and transition conditions that must be fulfilled |
Always read metrics with sample size, period, definition, and included costs. For example, winning 8 of 10 well-qualified opportunities does not mean an 80% win rate across every new customer group. AI that produces an output quickly may still cost more after review and rework. Comparisons need jobs of similar difficulty and quality criteria. Those numbers illustrate how to read a metric; they are not actual sales results.
Once the evidence is adequate, revisit achievable revenue, delivery cost, renewals, collection dates, and investment in the forecast. If AI or reusable components already improve profit and cash flow there, do not add a second IP value or premium. Changing WACC separately requires support from risk and cost of capital.
For now, this article keeps all three scenario outputs as shown in the table. I would use the claimed strengths as a request for evidence before changing any particular assumption, rather than adding a percentage of value based only on the description.
Before discussing price, turn the model into a list of claims to verify
| Claim to verify | Evidence | If the answer remains unclear |
|---|---|---|
| Revenue is sustainable | Contracts, renewals, existing-cohort revenue, and reasons for churn | Separate scenarios; do not promise that past revenue continues indefinitely |
| All costs are counted | Replacement labor for the owner, AI usage, rework, and development budget | Correct profit and cash plans before pricing |
| Rights can be used and transferred | Ownership evidence, licenses, and customer terms | Set case-specific terms to resolve rights or obtain consent before transfer |
| Receivables are collectible | Aging, post-balance-sheet receipts, and acceptance disputes | Adjust collection and at-risk items based on evidence |
| Work can be handed over | Manuals, successors, system access, and operations tests | Disclose transition costs and the handover period |
| Price matches what is being bought | Share or asset scope, cash, debt, and service obligations | Prepare a verifiable price bridge and adjustment terms |
As an owner, I would make revenue, cost, and rights evidence traceable before seeking a higher multiple. As a buyer, I would focus on cash sustainable after replacement labor and further investment, and on conditions that must hold before paying the price. ARR and IP add questions to analyze, but the basic ones remain: who pays, what must the company deliver, and how much cash is left afterward?
Learning model; concepts checked as of October 19, 2026. All tax rates, discount rates, growth, royalties, and multiples are assumptions. This is not a valuation of any business, an offer price, or personal investment advice.
