Calculating company value

Are you curious to find out the value of your company? If so, you are sure to have noticed that a great deal of information is available on calculating the value of a business. What exactly is the difference between all these different valuation methods? And what is the best way to calculate the value of your company? To answer these questions, and for the sake of completeness, we first detail the various methods below.

Calculating company value on the basis of assets

In this case the value of a company is actually calculated using the business's balance sheet. There are two different methods:

  • Intrinsic value. The intrinsic value of a business is equal to the equity capital according to the balance sheet, taking account of any hidden reserves. This method does not take any account of the potential of the business and the results to be attained.
  • Liquidation value. This is the calculation of the value if the expectation is that the business will have to be liquidated. The point of departure of this value is the directly achievable yields of the assets minus the debts and the costs related to the liquidation.
  • Calculating company value on the basis of the profit

A valuation method based on the (expected) profit is the improved profitability value method. This method involves a standardised profit and loss account being drawn up on the basis of a number of relevant years. The future profits are based on the results achieved in the past. The resulting profit is multiplied by the capitalisation factor. The capitalisation factor is based on a return requirement. The return requirement consists of the risk-free interest rate, an increment for the non-marketability of shares in the small and medium-sized business and a risk increment which is related to the specific circumstances and risks of the company in question. When the standardised profits are multiplied by the capitalisation factor, the excess/deficit of equity capital in the business is added to/deducted from this amount. This enables the stand-alone value of the business to be determined.

Calculating company value on the basis of multiples

In the case of market multiple methods the value of a company is based on the market value of comparable companies in the sector. Before the company is compared, a strict selection has to take place of the most suitable other companies in the sector. The group the company is compared with must, among other things, have the same risk profile and the same growth forecast. Putting together a good comparison group can be tricky, therefore. However, once a realistic comparison can be made the method is then fairly easy to use.

Calculating company value on the basis of the cash flow

The Discounted Cashflow methods (including the Adjusted Present Value method and the WACC method) are purely future-oriented and are based on the assumption that the value of the business is equal to the net cash value of the free operational cash flows which will eventually be paid out to the providers of loan and equity capital in the future. For more information on these methods please refer to calculating the net cash value of the operational cash flow.

Using the right method to calculate the value of your company

For a long time company valuations were based on the past and on accounting principles. However, results achieved in the past offer no guarantee for the future. That is why the Sophista team always bases its valuations on cash flow methods. Would you like us to carry out a valuation of your company? Please contact André Scheirlinck.

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