Company valuation is a process where the economic value of a company is determined. With the help of the valuation, you would be able to determine the fair value of a company. These include determining the sales value, establishing partner ownership, and also closing deals. The owner of a company usually visits professional business valuators for getting an objective estimate of the business’ value. Learn more about business valuations.
There are numerous reasons as to why a business valuation is needed, but one of the leading reasons is when a business wants to sell a portion or all of its operations. Another reason is when a company wants to acquire or merge with another company. The process of finding the value of a business involves evaluating all aspects of the business and using objective measures.
Company valuation usually includes capital structure, market value of its assets, or the future earnings prospects of the company. The methods of valuation can vary among industries, businesses, and valuators. But some of the most common methods of valuation include similar company comparisons, discounting cash flow models, and the review of financial statements.
As shown on the balance sheet, the book value of the company is the value of the shareholders’ equity in the business. This value is calculated by subtracting the cumulative liabilities of the business from the total assets. The figure that you’re left with represents the value of any tangible assets the company owns. The book value approach may be particularly useful if your business has low profits but valuable assets.
This is the overall money that the business gets if the assets of the business were liquidated and the debts were paid off. This is also a method for the company valuation that is considered by some companies.
This method of valuation is based on the predictions of future cash flows of the company. These are then adjusted to help determine the current market value of the company. The main focus of this method is that it also takes inflation into consideration when calculating the present value of the company. Discounted cash flow analysis estimates the value of a company or investment based on the money, or cash flows, it’s expected to generate in the future.
The enterprise value is calculated by combining a company's debt and equity and removing the amount of cash it's currently holding in its bank accounts (since it’s not part of its actual operations).
Enterprise value can be calculated by adding debt to equity and subtracting cash.
When examining earnings, financial analysts generally don't like to look at the raw net income profitability of a company because it's manipulated in many ways by the conventions of accounting, and some of them can distort the true picture.
In normal accounting, if a company purchases equipment or a building, it doesn't record that transaction all at once. The business instead charges itself an expense called depreciation over time. Amortization is the same as depreciation but for things like patents and intellectual property. In both instances, no actual money is spent on the expense side.
In some ways, depreciation and amortization can make the earnings of a rapidly growing company look worse than a declining one. This sort of distorted picture especially happens to behemoth brands like Amazon and Tesla.
The earnings multiplier is a method of valuation that can be utilized to obtain an accurate image of the value of a business. This is because the profits of a company are a much more reliable indicator of its financial success compared to the sales revenue of the company. This method of valuation adjusts the future profits against the cash flow that has the potential to be invested at the prevailing interest rate over time. In short, the current P/E ratio is adjusted to account for current interest rates.
This is one of the methods of valuation where the stream of revenues produced by the business over a specified period is applied to a multiplier. This multiplier is based on the economic and industry environment. For example, a tech company may have a value of three times the total revenue, while a service firm might only be valued at 0.5 times the total revenue.