Decoding Value: The Hidden Layers of Valuation in Brazil Every CEO, CFO, and Shareholder Should Know

This reflection, valid in any country or market, becomes even more relevant in Brazil given certain particularities of our business environment. Valuation has its own set of challenges: it goes far beyond formulas and involves aspects such as strategy, contextual analysis, risk sensitivity, and, above all, practical experience to avoid pitfalls and identify opportunities.

Brazil, with over 200 million people, ranks among the world’s largest economies and remains a land of immense opportunities—especially now, as global players turn their attention to its growth potential. However, the Brazilian environment imposes unique additional elements, such as: macroeconomic uncertainties, the complexity of the tax system, and the volatility of the capital markets, among other factors.

As we have seen throughout our journey, for CEOs, CFOs, and shareholders, understanding and systematizing the analysis of this added complexity is not merely a competitive advantage—it is a strategic necessity that can separate those who can protect the value of their business from those exposed to risks that can be very costly.

Among the main valuation methods, two are most commonly used in Brazil: relative valuation (for example, earnings multiples, revenue multiples, etc.) and valuation based on future profitability / discounted cash flows (DCF).

The first critical distinction in Brazil is the dilemma between DCF and multiples. In developed economies, multiples can provide a reasonable shortcut for initial estimates. Here, however, this relatively simpler approach is also more imprecise: the scarcity of comparable data from public companies and homogeneous private companies, lower market liquidity, sector volatility, tax impacts (such as regional incentives), and the rapid changes in the macroeconomic environment make multiples alone less reliable. Comparing multiples of Brazilian companies with peers listed on international exchanges, without adjusting for differences in risk, regulatory environment, and market maturity, can lead to significant distortions in the estimated value. It is not uncommon for expectations to be frustrated precisely by ignoring these impacts.

Therefore, any value derived from multiples must always be used with the appropriate caution and understanding, including a “consistency check” of the valuation within the broader context.

As economist Roberto Faldini, former chairman of Bovespa, once said: "The Brazilian market is like a restaurant menu on a stormy day: prices change before you even place your order." This highlights the need for extra care when using market parameters.

This is precisely why Discounted Cash Flow (DCF) stands out as the fundamental methodology in Brazil—because it allows for incorporating different scenarios and adjusting projections in line with macroeconomic changes. It enables building value from the fundamentals of the business, projecting cash flows anchored in the local context and appropriately accounting for superficial market fluctuations. It is the method that offers the necessary depth for strategic investment and divestment decisions.

Naturally, DCF is not perfect. It is only as good as the inputs it receives. In specific cases, it may not capture all nuances—but, almost always, the problem lies less in the technique and more in the evaluator’s judgment. Those who master different valuation approaches use DCF as a guide, validating or adjusting value assessments based on well-founded criteria.

Another critical challenge in Brazil is building the discount rate used in DCF—the weighted average cost of capital (WACC). It is not necessarily a fixed number, but a dynamic exercise in risk pricing—reflecting market perceptions about the country, the market, and the specific asset under analysis. For example, the country risk premium, historically higher in Brazil than in developed markets, raises the required rates of return, which in turn compresses valuation multiples in the local market. Furthermore, the volatility of interest rates, the significantly higher cost of debt compared to other markets, and the peculiarities of credit in Brazil make defining WACC a continuous task that requires constant attention.

Another fundamental point is the tax impact of debt. In Brazil, the deductibility of interest expenses has significant weight, potentially generating substantial tax savings (“tax shields”) and significantly influencing a company’s value. In developed markets, where the cost of debt is lower and the tax burden lighter, this effect tends to be less relevant—although there is often a tendency to maintain a higher level of debt in the capital structure. Therefore, understanding the peculiarities of the Brazilian credit market, the impact of the cost of debt, and the associated tax benefit are also essential factors for a valuation that is realistic and aligned with local realities.

The complexity of the Brazilian tax system must also not be overlooked. Our tax structure—with its numerous taxes, regimes, and incentives—directly impacts projected cash flows. A regional tax benefit or a contingency identified in a due diligence can substantially alter a company’s value. Valuations based solely on multiples often overlook these nuances: a company benefiting from regional incentives may be sold at a much higher price than a competitor in the same sector without such benefits. Ignoring these characteristics can have significant consequences.

In summary, valuation in Brazil is not just a numerical exercise—it is a strategic decision. It requires a deep understanding of risks, analytical expertise, and the ability to adapt to a constantly evolving environment. For the C-level, it is the tool that allows navigating complex waters, identifying true value, and making decisions that drive growth, capital preservation, and profitability—even in one of the most challenging—and fascinating—markets in the world.

In our daily practice, there are no shortcuts: each valuation is unique, and every decision must be carefully substantiated.

One final reminder: the result of a valuation and the transaction price (the “price”) are not necessarily the same. Several other factors—market timing, liquidity preferences, buyer type, the negotiation process, and many others—play a key role in determining the final transaction price. But that is a topic for another discussion.