What Is Company Valuation? The Essentials Of Company Valuation

Company valuation is a process of determining the current value of a company. There are many ways to calculate it, but three major business valuation methods are used most for valuing a company and that too depends on the company type and requirements.

What is Company Valuation?

Company valuation is a valuation process of determining the current value of a company. In fact, the valuation process is quite simple: the value of a company is its market capitalization. What is that? Market capitalization is simply the market value of a company’s outstanding shares.

When a company share of stock is purchased or sold, the purchaser or seller is usually offering the buyer the current market value of the share of stock (rounded to the nearest dollar amount), or what is commonly referred to as the dollar price. The dollar price is the total value of all of the shares in the company, all of its profits, debts, assets, cash flows, and all of its future earnings. It is only a rough approximation valuation report of the company’s value.

Why Valuation Matters

Business valuation is the process of determining the value of a business. This involves knowing the amount of money, assets, cash flows, or anything else a company is worth. Before deciding to buy a business, you need to know the full cost of ownership. If you don’t understand a business or the cost of ownership, you shouldn’t consider buying it. A business valuation process usually includes an analysis of the costs to obtain customers, investors, or suppliers. When calculating the costs, the business valuation professional will consider the value of its brand, management, and products.

Importance of Conducting a Business Valuation

Simply put, a valuation report is the valuation report of a business that describes the current value of that company. Not all companies are valued, and not all businesses need to be valued. However, the value of a business is important. If a business owner is worried about his/her ability to make a return on their investment, they are in the wrong business. If the business owners want to maximize their return and cash flows on investment, they should have the valuation performed and understand the valuation for their business. Let's go over the basics of how a company valuation is done.

Company valuation is based on two basic aspects: equity valuation and enterprise valuation. Equity Valuation Equity valuation is the value of the business from a "common stockholder" perspective. Unlike the Equity Valuation, Enterprise Value is what we call the entire measurement of a company valued.

How to Valuate a Company

Since no two companies are exactly alike, it is impossible to provide exact figures for each company's valuation, so it is important to understand how valuation works before attempting it. First, there are three main methods used to value a company. While different companies will employ different methods, all the business valuation methods can be categorized into three approaches. Source; Economictimes

1. Market Approach
2. Asset Approach
3. Income Approach

There is one constant in all three approaches: total current assets are taken into account. Current assets include cash, accounts receivable, inventory, fixed assets, and accounts payable. A company's liquid assets are kept in a separate section from current assets, but it is still included as part of the total current assets. The next two sections are taken into consideration after total current assets.

Types of Company Valuations

The Essentials Of Company Valuation; Let’s start by outlining three of the main types of valuations:

• Comparable Companies Multiple Method
• Discounted Cash Flow Method (DCF)
• Net Asset Value Method (NAV)

There are many different ways to value a company. But before you choose one, you should know that there are 3 main categories - Asset Approach, Income Approach, and Market Approach. And it generally depends on what the company is worth in the market.

Here we have picked major 3 business valuation methods for valuing a business.

#1 Comparable Companies Multiple Method

The fundamental idea is that if you look at several comparable companies and determine that they have a market share between 10% and 20%, you can use this as a base level valuation.

A common way to value a company is by comparing it with similar companies. This means looking at how the stock price moved in the last month or a year for all other stocks that have the same asset(s) or business. In most cases, if the market cap of these stocks is comparable, it can be used as a good starting point. In other cases, we will want to also examine some of the different indicators to get an even better view of a particular company.

Some of the indicators that can be used in the comparable companies multiple valuation methods are: Share Price Movement In The Last Month Revenue Growth, In The Last Year Earnings Growth, In The Last Year Valuation Metrics, and The first set of valuation metrics that we can use when evaluating a company and preparing valuation report for the business owners.

#2 Discounted Cash Flow Method (DCF)

One of the most commonly used valuation methods, the Discounted Cash Flow method focuses on the cash flows. Most of the time, we want to know how much money the company is earning in a year, and that will be based on the number of shares of the company, its revenue, and the gross profits. The Discounted Cash Flow valuation process consists of 2 main parts. The first part is the discounted terminal value (distribution method) and the second part is the base-value method (with-holding method).

#3 Net Asset Value Method (NAV)

Generally, the income approach is the most favorable approach for investors. It combines the top 3, 4, and 5 companies based on their Net Asset Value (“NAV”), and comparing them with a benchmark index. If the company has a NAV of $1.00, and the benchmark index is $10, then the average company in the benchmark index is $10. The NAV of the company is the price at which the company could be sold in the market, without actually selling the company. If the company is worth more than the NAV, then it is considered a ‘’Class A’’ company, and that’s why people often call it a ‘’zero net asset value’’ stock.

Can You Do business Valuation All By Yourself?

Do you have any qualifications in finance? No, not really. You don’t have any capital invested. You don’t run your own business. And it’s pretty hard for most of us to do financial research and analysis. If you really need to hire someone to do it for you, you should go with a valuation professional. The valuation professional will know what the normal price to sell a stock for, so they’ll give you the correct value of the stock and tell you what the right price is. They’ll be able to analyze the risk-reward ratio and suggest a price to sell your stock. And if you have no money and no real knowledge, go with the ultimate low-risk investment, money market fund! Caveats And yes, sometimes, an investment banker can still be pretty good.

Company Valuation | Who Can Perform A Business Valuation?

The business valuation methods are determined by analysts or the company’s management and valuation professionals. However, it is often more frequently performed by the valuation professional.

If you’re in an MBA program, you might have been taught about business valuation methods, especially the Discounted Cash Flow Method, but didn’t really understand it. In a nutshell, it’s the most common of valuation methods used for publicly traded companies. Each of the three main types of business valuation methods has its own pros and cons. So if you’re weighing these options, it’s always best to talk to a business valuation professional to find out what makes the best financial sense.

Do you want to know what business valuation methods are right for your business? Of course every business owner willing. Get in touch with us.