IFFM Blog #7: Corporate Valuation: Concepts and Evidence

Corporate valuation in most instances is used by investors looking to invest into companies, stakeholders (managers) looking at increasing shareholder value and companies looking at merger & acquisition (M&A) of another company, or the other way around where the smaller company uses valuation to determine the price it should sell at.

The valuation of a company relies on many factors, from the current economy environments to the comapany's balance sheet. (Ward, 2017) Typically, business owners should not valuate their company by themselves and they would lack the impartiality to valuate the company objectively. Instead, professional valuators should be soughted to provide a fair and accurate valuation of the company.

There are three valuation approaches:
  1. Stock Market Valuation
    • Stock market valuation is very simply the number of ordinary shares vs the current market price (also known as market capitalisation)
    • This provides a useful gauge or guide to the share price
    • However, this does not fully reflect value of all shares and its possible unhelpful if the shares are rarely traded or not traded at all.
  2. Net Asset Value Based Valuation
    • Net asset valuation has three ways to determine company asset values; Net Book Value, Net Realisable Value and Fairness Opinions
    • Fixed Assets + Net Current Assets - Long Term Debt = Net Asset Vaue
    • However, this can unstate value of intangibles and does not account for potential or future changes in income.
  3. Income Based Valuation
    • Income based valuation orientates towards the company's potential and future, assuming that it will continue to remain a going concern.
    • There are two methods; Dividend Valuation Models and Discounted Cash Flow Models
    • However, it is difficult it valuate intangibes (intellectual property rights) and future earnings may not be taken to account.


References:
Ward, S. (2017). 3 Ways to Discover What Your Small Business Is Really Worth. [online] The Balance. Available at: https://www.thebalance.com/business-valuation-methods-2948478 [Accessed 31 Jan. 2018].

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