14 Ara, 2024
Company Valuation
Aztek Global Trade

Company Valuation

Company valuation is the process of determining the price at which a company could change hands in its current state. The valuation is conducted based on the company’s financial statements and data prepared in accordance with legal records, following International Valuation Standards (IVS). A detailed report is then prepared.

Popular Valuation Methods

While there are numerous methods for company valuation, the most commonly used are:

  1. Discounted Cash Flow (DCF) Method
  2. Multiples Method
  3. Net Asset Value (NAV) Method

Discounted Cash Flow (DCF) Method

The DCF method values a company based on its ability to generate free cash flow. The valuation is derived by discounting future free cash flows to the present value and adding the existing free cash.

Key components considered in calculating free cash flows include:

  1. Core operations
  2. Asset acquisitions and investments
  3. Financing costs
  4. Changes in working capital
  5. Taxes
  6. Capital
  7. Current net cash

The net cash inflows and outflows from these components are offset, and the resulting free cash flow amounts are discounted to the present value using a specific rate. This yields the DCF valuation. Free cash flows also represent the returns that shareholders can expect to receive from the company.

Multiples Method

This market-based valuation method uses parameters derived from the pricing of comparable companies in the market to value the target company. Financial ratios from the target company’s financial statements are compared with those of similar companies to arrive at a valuation.

Common ratios used in multiples analysis include:

  1. Price-to-Earnings (P/E) Ratio: The ratio of the company’s market value (P) to its net profit (E) over the last year.
  2. Enterprise Value-to-EBITDA Ratio: The ratio of the company’s enterprise value (EV = market value + net debt) to its EBITDA over the last year.
  3. Price-to-Book Value (P/B) Ratio: The ratio of the company’s market value to its book value (equity) as stated in the latest balance sheet.
  4. Enterprise Value-to-Sales Ratio: The ratio of enterprise value to net sales over the last year.

Sector-specific ratios may also be used in multiples analysis, depending on the industry.

Net Asset Value (NAV) Method

The NAV method values a company based on the difference between the real value of its assets and liabilities. The balance sheet’s difference between assets and liabilities represents the company’s equity. However, the real values of these differences represent the true value of equity, which is the company’s market value.

This method involves valuing:

  • Real estate, investments, and trade receivables at their true value.
  • Monetary amounts (receivables, payables, etc.) at their present value.
  • Real estate at appraisal value.
  • Other assets and liabilities using appropriate valuation methods.

The difference between the real value of the assets and liabilities determines the company’s market value.

The NAV method is particularly suitable for:

  • Holding companies
  • Real estate investment trusts (REITs)
  • Companies in liquidation

By utilizing these valuation methods, businesses can obtain a comprehensive and accurate understanding of their market value, enabling informed decision-making for investments, mergers, and other strategic initiatives. Contact Aztek Global Trade for professional valuation services tailored to your company’s unique needs.