Economic and financial valuation

The valuation is a fundamental process in the identification of the sources of wealth creation, transfer and destruction. This process is applied in many operations related to mergers and takeovers, or in a company entrance to the stock market. The exit of a shareholder, the request for external financing or in business successions are also causes that require an assessment of the value of the company.

 

 

The process of business valuation requires a profound knowledge of the company in order to solve great difficulties when assessing value to a living company, value that can change depending on the management.  

 

Furthermore, nowadays the increasing importance of the intangible assets adds difficulty to the valuation activity as, more and more, the greatest weight of the company’s value does not come from their tangible assets but, instead, from the intellectual capital. (See the paragraph “Global business consultancy: Balanced Scorecard).

As a consequence of that, some methods have emerged to measure a company’s capacity to generate wealth and to identify the value of the intangible assets, all with the aim to have a more realistic valuation of the company’s real value.
 
The specific circumstances that might require a company valuation are: 
  • The sale of shares in the stock market.
  • Stock market public offerings: Public Offer for the Sales Shares (POSS).
  • The purchase of shares from a capital risk society.
  • Mergers, takeover bids for securities and joint ventures.
  • Leverage buy-outs.
  • Stock options plans
  • Buy and sell of shares of unlisted companies.
The main valuating methodologies:

1 - Discounted Cash Flows: The value of a company depends entirely on its capacity to create future wealth. Therefore, the valuating method that should be applied should be based on the discounted Cash Flows.

  • Free cash flow (FCF).
  • Equity cash flow (ECF).
  • Dividends.
  • Capital cash flow (CCF).
  • APV, NPV.

However, sometimes trying to calculate these cash flows can be a difficult process: Because not all necessary information is available, or due to the erratic behaviour of cash flows.  

2 - Balance Sheet: Static methods based on accounting information: Against these difficulties, the best way to assess a company’s value is through the static methods which take into account the accounting value of the company’s assets and liabilities.
  • The accounting book value.
  • The adjusted accounting book value.
  • The liquidation value.
  • The due diligence.
 3 - Income Statement: Valuation using multiples: In the market analysis these methods are complemented with a valuation using multiples, also known as relative valuation. 
  • Multiples based on company's value or profitability
    • Return on Assets (ROA).
    • Return on Equity (ROE).
    • Company’s value / EBITDA.
  • Multiples based on market capitalization: 
    • Price Earnings Ratio (PER).
    • Earning Yield Gap (EYG).
    • Price Cash Flow (PCFR) or Price to Cash Earnings.
    • Price to sales (P/S).
    • Price to Levered Free-Cash Flow (P/LFCF).
    • P/AV (Price Accounting Value).
    • Dividend yield.
  • Multiples based on company’s growth
    • Price Earnings Growth PEG = PER/g .
    • (Company’s value / EBITDA)/g . 

4 -Mixed valuation methods (Goodwill): A third way is to mix the two previous methods, a mixed valuation approach. 

  • Classic valuation method.
  • Union of European Accounting Experts Abbreviated Income.
  • Indirect method.
  • Direct method.
  • Annual results buying method.

5 - Value creation:

  • EVA.
  • Economic profit.
  • Cash Value Added.
  • CFROI. 

6 - Real options aviation: In case we can incorporate the uncertainty of the cash flows calculation, the best approach would be the real options valuation methodology (real options analysis). 

  • Options and types of options.
  • The binomial method of shares valuation.
 
 
 
 
 

NOTE! This site uses cookies and similar technologies.

If you not change browser settings, you agree to it. Learn more

I understand

COOKIES POLICY

Cookie is a file that is downloaded to your computer to access certain web pages. Cookies allow a website, among other things , store and retrieve information about browsing habits of a user or your computer, depending on the information they contain and the way you use your computer, can be used to recognize the user .. the user's browser stores cookies on your hard drive during the current session only occupy a minimal memory space and not harming the computer. The cookies do not contain any specific personal information, and most of them are deleted from the hard drive at the end of the browser session (so-called session cookies) .

Most browsers accept cookies as standard and , independently thereof, in granting or denying security settings stored cookies or temporary .

Without your express consent, by enabling cookies in your browser - SMB-FINANCE will not link in the cookies stored data with your personal data provided at the time of registration or purchase ..

What types of cookies used this site ?

- Technical Cookies : These are those that allow the user to navigate through a web page or application platform and the use of different options or services it exist as , for example, control traffic and data communication , identify session , access restricted parts , remember the elements of an order, make the buying process an order, make the request for registration or participation in an event, use the security features while browsing store content for broadcast or sound or video content sharing through social networks.

- Customization Cookies : These are those that allow the user to access the service with some features of a general nature based on a predefined set of criteria in the user terminal such as would be the language, the type of browser through which you access the service , the locale from which you access the service , etc. .

- Cookies analysis : those that are well treated by us or by third parties, allow us to quantify the number of users and perform the measurement and statistical analysis of the use made by users of the service provided. This is discussed in browsing our website in order to improve the supply of products or services that we offer .

- Advertising Cookies : These are those who , well treated by us or by third parties, allow us to manage the most effective way possible to offer advertising spaces in the website , tailoring ad content to the content of the requested service or use they make of our website. So we can analyze your browsing habits on the Internet and we can show you regarding your listing Advertise with navigation .

- Cookies behavioral advertising : are those that enable the management , the most efficient way of advertising spaces , where appropriate , the publisher has included a website , application or platform from providing the requested service. These cookies store information on user behavior obtained through continued observing their browsing habits , allowing develop a specific profile to display ads based on the same .

Third Party Cookies : The Web of smb-finance.com can use third-party services on behalf of SMB-FINANCE , compile information for statistical purposes , to use the Site by the user and to the provision of other services relating to website activity and other services Internet .

In particular , this website uses Google Analytics, a web analytics service provided by Google , Inc., registered in the United States with headquarters at 1600 Amphitheatre Parkway, Mountain View, California 94043 . To provide these services, they use cookies to gather information , including the user's IP address , which will be transmitted , processed and stored by Google on the terms set out in the Web Google.com . Including the possible transmission of this information to third parties for reasons of legal requirement or where such third parties process the information on Google's behalf .

The user expressly agrees by using this Site , treatment of information collected in the manner and with the above purposes . And know also recognizes the possibility of refusing the processing of such data or information by rejecting the use of cookies by selecting the appropriate settings for such purpose in your browser . While this option of blocking cookies on your browser may not allow the full use of all the functionality of the Website.

Can you allow, block or delete cookies installed on your computer by setting your browser options installed on your computer:

If you have questions about this policy of cookies, please contact info@smb-finance.com