There are numerous ways a company can be valued – below an overview of different valuation methods you can also test and try in the Financial Analyzer Demo Environment.
1. Net Asset Value (Book Value)
This is the value of shareholders’ equity of a business as shown on the balance sheet statement. The net asset value is derived by subtracting the total liabilities of a company from its total assets.
2. Earnings Multiplier
The earnings multipliers may be used to get a picture of the real value of a company, since a company’s profits are usually the most reliable indicator of its financial success.
3. Present Value of Future Profits (Discounted Profit Method)
This method is based on projections of future Profits for the period (excluding nonrecurring items) or Present value of future operating profits – interest-bearing net liabilities.
By paying this much for the company, the company pays back the purchase price with its profit in the coming years and at the same time gives the investment the expected annual return (in this example 8%).
4. Present Value of Future Free Cash Flows (Discounted Free Cash Flow Method)
This method is based on projections of future cash flows.
Free cash flow (FCF) is a way of looking at a business’s cash flow to see what is available for distribution among all the stockholders of a corporate entity. FCF tells how much cash can be extracted from a company without causing issues to its operations. Many analysts prefer free cash flow to earnings as a basis for evaluating a company’s performance because free cash flow is more difficult to fabricate. In general terms, the higher a firm’s free cash flow, the better.
Annually free cash flow may be different from net income, as free cash flow takes into account the annual purchase of capital goods and changes in working capital. Accelerated depreciation of assets also creates a widened differential between cash flow and earnings reported. In the long run cumulative FCF is equal to cumulative net income.
In SBB Financial Analyzer FCF is estimated using Cash Flow Statement and also using Financial statement.
Financial statement gives a more stable picture of the company’s present value, because the investments are allocated to future years as annual depreciation and not as a single large annual payment.
By paying this calculated Value of Share Capital for the company, the company pays back the purchase price with its future free cash flows in the coming years and at the same time gives the investment the expected annual return (in this example 8%).
You can find even more detailed value calculations based on FCF or EVA (Economic Value Added) in SBB Financial Analyzer.
5. Market Capitalization of Public Companies / Value Based on EPS Forecasts
Market capitalization is the simplest method of business valuation. It is calculated by multiplying the company’s share price by its total number of shares outstanding.
Many investment companies publish EPS (Earnings Per Share) forecasts for listed companies. With them, you can easily predict the development of stock prices of listed companies in SBB Financial Analyzer.