TIP725: FIRST PRINCIPLES OF VALUATION

W/ TIM KOLLER

29 May 2025

On today’s episode, Clay is joined by Tim Koller to discuss all things valuation.

Tim is the lead author of Valuation: Measuring and Managing the Value of Companies which is the #1 best-selling guide to business valuation. This book—now in its eighth edition—has sold more than one million copies, and is used as a textbook at top business schools such as Wharton School, University of Chicago, MIT, INSEAD, Tuck School of Business, and Northwestern University.

As a Partner at McKinsey & Company, Tim combines broad cross-sector experience with decades of service to clients in value creation, corporate strategy, capital-markets issues, and M&A transactions.

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IN THIS EPISODE, YOU’LL LEARN:

  • How companies create shareholder value.
  • The common misconceptions related to creating shareholder value.
  • How managers should think about return on invested capital.
  • Why it’s so common for managers to not take a long-term approach.
  • How return on invested capital impacts a company’s valuation.
  • How Tim thinks about the vast differences in returns we’ve seen in the US relative to Europe.
  • And so much more!

TRANSCRIPT

Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

 

[00:00:00] Clay Finck: On today’s episode, I’m joined by Tim Koller to discuss all things valuation. Tim is the lead author of Valuation, Measuring and Managing the Value of Companies, which is the number one bestselling guide on business valuation. This book now in its eighth edition has sold more than 1 million copies, and it’s used as a textbook at top business schools such as Wharton and MIT.

[00:00:22] Clay Finck: As a partner at McKinsey and Company, Tim combines broad cross-sector experience with decades of service to clients in value creation, corporate strategy, capital markets issues, and m and a transactions. During this episode, we cover how companies create shareholder value. The common misconceptions related to creating value, how managers should think about return on invested capital.

[00:00:43] Clay Finck: Why it’s so common for managers not to take a long-term approach, how return on invested capital impacts a company’s valuation. How Tim thinks about the vast differences in returns we’ve seen in the US relative to Europe, his most commonly used valuation metrics and much more. Tim delivered a wealth of knowledge and insights related to valuation during this discussion.

[00:01:04] Clay Finck: So with that, I bring you today’s episode with Tim Koller.

[00:01:10] Intro: Since 2014, and through more than 180 million downloads, we’ve studied the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Clay Finck.

[00:01:34] Clay Finck: Welcome to The Investor’s Podcast. I’m your host, Clay Finck, and today I am happy to be joined by Tim Koller. Tim, thank you so much for joining me here today.

[00:01:43] Tim Koller: Clay, thanks. I’m happy to be here.

[00:01:45] Clay Finck: So for those in the audience who might not know Tim, he co-authored the well-regarded book titled Valuation Measuring and Managing the Value of Companies, and they just released their eighth edition of the book.

[00:01:56] Clay Finck: It’s definitely an excellent resource for investors to draw on just so many topics related to valuation. And I thought a good place to start here. Tim was with a quote from the preface of your book. You write the book’s messages are simple. Companies thrive when they create real economic value for their shareholders.

[00:02:13] Clay Finck: Companies create value by investing capital at rates of return that exceed their cost of capital. These two truths apply across time and geography. Now, I think back to when I first got started in investing, if you would’ve shown me those lines, I would’ve been like, what in the world are you talking about, Tim?

[00:02:30] Clay Finck: So how about you just speak to the significance of this and how it ties into what’s discussed in the pages that follow in the book?

[00:02:37] Tim Koller: That’s great question.

[00:02:39] Tim Koller: I’ll only break it up into two parts. One is sort of how do you create real value for your shareholders, for the company, for the economy. Ultimately, what matters, as with any investment, is the cash flows that you generate and the way you generate cash flows is by earning more than your cost of capital.

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