Business Valuation and Methods of Valuation



A business valuation is the process of determining the economic value of a business entity. A business valuation, sometimes referred to as a company valuation, is the systematic assessment of the economic worth of a corporation. Throughout the valuation process, a comprehensive analysis is conducted on all aspects of a corporation in order to ascertain its value as well as the value of its individual departments or divisions. A company valuation is used to ascertain the equitable worth of a firm for several purposes, such as determining its selling value, establishing ownership among partners, assessing taxes, and even in divorce procedures. Owners sometimes seek the assistance of experienced business assessors to get an impartial assessment of the firm's worth.

1. Market Capitalization Market capitalization is the most straightforward approach of assessing the value of a corporation. The calculation involves the multiplication of the company's share price by the total number of shares it has issued. As of January 3, 2018, the stock price of Microsoft Inc. was $86.35. The company's valuation may be calculated by multiplying the total number of outstanding shares, which is 7.715 billion, by the share price of $86.35. This results in a valuation of $666.19 billion.

2. Times Revenue Method The Times Revenue Method is a valuation technique that calculates the value of a company by multiplying its revenue by a certain factor. The times revenue business valuation approach involves applying a multiplier to a stream of revenues earned during a certain timeframe, with the multiplier being determined by the industry and economic conditions. As an example, a technology business may have a valuation that is three times its sales, but a service organisation may have a valuation that is half its revenue.

3. Price-to-earnings ratio Instead of using the Times- revenue approach, one may use the earnings multiplier to get a more precise assessment of a company's true worth. This is because a company's profits serve as a more dependable sign of its financial prosperity compared to its sales revenue. The earnings multiplier accounts for the potential return on investment that may be achieved by investing cash flow at the prevailing interest rate throughout the same time frame, hence adjusting future profits. Put simply, it modifies the existing P/E ratio to factor in the prevailing interest rates.

4. The Discounted Cash Flow (DCF) Method The Discounted Cash Flow (DCF) Method is a financial valuation technique. The DCF (Discounted Cash Flow) approach of company valuation has resemblance to the earnings multiplier. This approach relies on forecasting future cash flows and then adjusting them to get the present market value of the firm. The primary distinction between the discounted cash flow approach and the profit multiplier approach lies in the fact that the former incorporates inflation in its computation of the current value.

5. Book Value The monetary value of a company's assets minus its liabilities, as shown on its balance sheet. Shareholders' equity refers to the value of a company's assets less its liabilities, as shown on the balance sheet statement. The book value is calculated by deducting the company's total liabilities from its total assets.

6. Liquidation value Value of assets when they are sold quickly, usually at a discount, to generate cash for a company's creditors. The liquidation value refers to the amount of cash that a firm would get if it were to sell all its assets and settle all its debts immediately. This list does not include all of the company valuation methodologies currently in use. Additional approaches include replacement value, breakup value, asset-based valuation, and several more.

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