Updated: Dec 8, 2021
The valuation of a company is an important aspect in financial dealings. Entrepreneur can use valuation for availing the debt/loans, to ascertain it's market price and to improve the status in the industry and in the business community.
There are three type of factors, which affect the valuation of the organization. One has positive impact, second has negative impact and third can have either positive or negative impact.
Here are few factors, which effect the valuation of the companies:
Value of Operations: This factor can give either positive or negative impact. Any organization get it's the valuation based on how it has been performing in near past and at present. To find that value, one need to find the cash flow and multiply it by (1 + current growth rate of the organization). For example, if your cash flow is Rs. 10,00,000 and your growth rate is 5%, you multiply 1,00,00,000 x 1.05 to get Rs. 10,50,000. Divide that figure by the difference in cost of capital and the growth rate. If cost of capital is 12%, so, difference is 7%, the final valuation calculated is obtained by dividing Rs. 10,50,000 by 7% and it come Rs. 1,50,00,000, which is the value of organization's operations.
Assets in Business: The corporate valuation model begins with finding the value of assets the organization already own. This includes land and building, plant and machinery, other equipment, vehicles and all supplies including inventory. To get the valuation, one need to compare them to similar products which other companies are selling at present or by book value of the each asset.
Non-Operating Assets: In an organization, there may be assets, which might be generating the income, but they don't contribute to operations. Assets like investment accounts, bonds, cash which are earning interest and any real estate the organization own that is not directly used as part of the operation. To determine the value, consider the current cash value at the time of valuation.
Brand and Goodwill Value: Strong brands with high customer loyalty is an intangible asset for the organization, which have value linked. There is no mathematical formula to establish a value for intangible assets. One needs to estimate this value. The market would accept an educated guess about the value of intangible assets at the time of sale of the business. One may even add a premium to it's company's value based on what similar companies in the industry have done. The basic idea is that as organization is worth more because it has earned people's trust.
Valuation Method: Each organization is different and each industry or sector has unique characteristics that may require different and multiple valuation methods. When deciding which valuation method to use for the valuation of an organization, it's easy to get confused and overwhelmed by the number of available valuation techniques, as each gives different value. There are valuation methods which are fairly straightforward while others are complicated.
There are multiple methods for valuation an organization, each with its own strengths and weaknesses. Some models try to pin down the organization's intrinsic value based on its own financial statements and current and future projects, while others look to relative valuation against peers. Typically the valuation methods fall into two main categories
1. Absolute Valuation: Absolute valuation models attempt to find the intrinsic or "true" value of an investment based only on fundamentals. Looking at fundamentals simply means you would only focus on criteria like dividends, cash flow, and the growth rate for a single company—and not worry about any other companies. Valuation models that fall into this category include the dividend discount model, discounted cash flow model, residual income model, and asset-based model.
2. Relative Valuation: Relative valuation models operate by comparing the organization to other similar organization in the industry. These models involved by calculating multiples and ratios, such as the price-to-earnings (P/E) ratio and comparing them to the multiples of similar organizations. For example, if the P/E of an organization is lower than the P/E of a comparable organization, the first organization might be considered undervalued.
The relative valuation model is a lot easier and quicker to calculate than the absolute valuation model, which is why many investors and analysts begin their analysis with relative model. None of the valuation model fits each and every situation. But, based on different parameters and the characteristics of the company, one can select a valuation model that best fit in the situation. Most of the time, investors run through the multiple valuations methods to get a range of possible valuations or average all of the valuations into one. Call2CFO are here to guide you to work on the parameter and help you to improve on parameters to get the good valuations.