Damodaran divides companies into six phases: Start-Up, Young Growth, High Growth, Mature Growth, Mature Stable and Decline. He argues that we need to look at a company in the context of these phases if we are to understand it and value it. Aspects that change over the life of a company include investing, financing and dividend policies, and the relative importance of narrative and numbers to understand it.

The concept of the business life cycle has often been used in management and strategy discussions, something that Damodaran acknowledges. His emphasis is how the life cycle concept can aid valuation by highlighting why there are different valuation challenges at different stages in a company’s development and how to adapt valuation models to meet those varying challenges.

The book draws out implications for corporate finance, valuation and investing. The corporate finance section considers the implications for the company’s investment, its financing and its dividend policy, subjects which are somewhat standard areas of corporate finance theory. The valuation and investing sections are more innovative in using the corporate life cycle framework to highlight the different issues that can arise as a company grows.

Damodaran builds on the ideas in his 1977 book, Narrative and Numbers – The Value of Stories in Business (Columbia Business School Publishing) in considering the relative importance of both narrative (that is, a description of the company’s plans and prospects) and financial results in valuing a business over its life cycle. At the outset, a start-up has very few financial or operational metrics and will often be valued by considering its concept, business plan and addressable market. As a company matures, it has more financial results that can be used to test the original plan and, by the time it becomes a mature stable company, it will be valued primarily by the financial results it is achieving. Damodaran highlights an interesting analogy between start-ups and companies in distress: mechanical valuation models won’t work and the value will depend mainly on judgements about the business plan and quality of management.

This life cycle approach has implications for investment and the book has an interesting discussion about how different investing philosophies apply to companies at different phases in their corporate life cycles and how each investment approach needs different skills – no approach can be considered pre-eminent. For example, growth investing involves backing companies that are building a business model and scaling up; in contrast, value investing in stable mature companies can involve screening for financial metrics based on the ideas of Ben Graham and Warren Buffet.

This is a thought-provoking book which, as you would expect, is rich with data, charts and diagrams. The book’s strength is that it pulls together corporate finance theory, valuation material including case studies, and investment thoughts into a coherent framework.

Finally, Damodaran recognises that books are quite expensive and a lot of this material can be found on his website and/or his free online courses.