How to Value a Company?

The The valuation of a company measures the environment and everything that includes a business including fixed/current assets, liabilities, brand, personnel, technology, etc. In other words, valuing a company means analyzing the entire environment in terms of technical and economic issues.

value a company

Specifically, it is the economic capacity that a business has to generate flow or profits in the future, it must have in its projection a long-term growth and an expected return due to internal and external factors that reflect the operation, environment and virtues of the company itself.

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Valuing a company usually requires the intervention of multidisciplinary groups, depending on the type of business, it can be listed mainly: financial, economists, actuaries, legal, fiscal and in some sectors technological and environmental experts.

There are 4 methods to value a company which tend to be the most common, with the discounted flow method being one of the most popular:

  • Discounted flows
  • multiples
  • Balance
  • Goodwill

The process of valuing a company can vary, but it usually begins with a due diligence and creation of profile, later a preliminary financial analysis is made, which will help to shape the development of an own and unique financial model according to the own needs that arose during the analysis of the previous points, later and once the financial model is concluded, interpretation is given of the results and conclusions.

The elements of a process business valuation can be divided into:

Technical Elements-Valuation method used
-Method Limits and Normalization
-Identification of value generators (value drivers)
Business Elements-Sector Analysis
-Environment Analysis
-Risk Analysis (Internal and External)
Negotiation Elements– Value sharing
– Value Ranges

Discounted Cash Flow Technique (FCF) What is it?

The most popular and common technique to value companies and investment projects is with the discounted cash flow methodology, establishing free cash flows, which at the same time are discounted under the VPN which is considered the risk rate known as wacc(k).

How is Discounted Cash Flows calculated?

how to do a company valuation

How is the NPV calculated?

how to do a company valuation

What applications does the Free Cash Flow method have?

For the company: Free Cash Flow for the Company (FCFE) is used to cover various expenses in the company, such as share repurchases, debt repayment, making new investments or maintaining a cash reserve within the company. company.

For Shareholders: Free Cash Flow to Shareholders (FCFA) is a financial metric that indicates the amount of cash a company has after completing all the investments required to maintain and grow its operation. This free cash flow is available for distribution to the company's shareholders, making it a crucial indicator of the value the company can offer its shareholders.

Discounted free cash flow: Discounted free cash flow is used to calculate the present value of the company's future cash flows. This calculation is made using a discount rate that reflects the opportunity cost of capital and the level of risk associated with the investment.

Multiples method to value a company

This method consists of valuing a company with the purpose of knowing its value in the market according to a comparison of companies that are similar.

The most commonly used financial multiples in this method are:

  1. Valuation multiple: It is calculated by dividing the company's market value (market capitalization or sales price) by a measure of its financial performance, such as earnings (net profit), revenue, or free cash flow.
  2. Price/earnings (P/E) multiple: It is the company's price per share divided by earnings per share. This multiple indicates how much investors are willing to pay for each unit of profit the company generates.
  3. Price/sales multiple (P/S): It is obtained by dividing the price per share by the income per share. This multiple compares the company's price to its sales level, which can be useful especially in companies with little or no profits.
  4. Enterprise value/EBITDA multiple: It is calculated by dividing the total value of the company (market capitalization plus net debt) by the EBITDA (earnings before interest, taxes, depreciation and amortization). This multiple is commonly used in mergers and acquisitions transactions.
  5. Enterprise value/revenue multiple: It is obtained by dividing the total value of the company by the income. This multiple compares the total value of the company with its income level.

Once these multiples have been obtained from comparable companies, an average or range of these multiples is calculated and applied to the company being valued to estimate its value, it is important to note that this method has limitations and does not take into account It takes into account qualitative aspects of the company.

Profitability of an investment project | How to calculate the PER?

The P/E is an important tool for investors because it provides an idea of how much they are willing to pay for each unit of profit generated by the company. A high P/E can indicate that the market has optimistic expectations about the company's future earnings growth. , while a low P/E may indicate that the company's shares could be undervalued relative to its earnings.

  • By PER method 

Suppose we have a fictitious company called “Company SA” that is listed on the stock exchange and has a share price of $50, furthermore, in the last year, the company has generated earnings per share of $5.

To calculate the PER of “Empresa SA”, we use the Price-to-Earnings Ratio formula:

PER =Price per share/Earnings per share

Substituting known values:

PER = 50/5

PER= 10 

This it means thatIn this case, the investor is paying 10 times the company's earnings for each share they buy, or put another way, it would take approximately 10 years to recoup their investment based on the company's current earnings.

Profitability of an investment project | How to calculate WACC?

The WACC (Weighted Average Cost of Capital) method represents a very important financial concept for the purpose of valuing projects and companies, it is a financial metric that represents the average cost that a company must pay for its capital, taking into account debt and equity, serves as a discount rate that is used to evaluate investment projects, determine the value of a company and calculate the return required for investors and creditors.

Formula:

WACC= E/V x Re + D/V x Rd x (1 – Tc)

Where:

  • E = Market value of equity capital
  • V = Total value of the company (E + D)
  • Re = Cost of equity capital
  • D = Market value of debt
  • Rd = Cost of debt
  • Tc = Corporate tax rate, which taxes the company's profits (usually corporate tax).

Suppose that “Anepsa” is a company that manufactures and sells technology products and is evaluating a new project, the company has the following capital structure:

Data:

  • Value of net worth (equity), AND = $10,000,000
  • Debt value, d = $5,000,000
  • corporate tax rate, tc = 25%
  • Cost of equity capital (cost of shares), Re = 10%
  • cost of debt, Rd = 5%

Substitution:

First, let's calculate the proportions of equity and debt in Anepsa's capital structure:

E/V = $10,000,000 / $10,000,000 + $5,000,000 = $10,000,000 / $15,000,000 = 0.06667

D/V = $5,000,000 / $15,000,000 = 0.3333

Then, we substitute these values into the WACC formula:

WACC = (0.06667 x 0.10) + (0.3333 x 0.05 x (1 – 0.25))

WACC = 0.0667 + 0.0125 

WACC= 0.07917 x 100 = 7.917%

Therefore, Anepsa's WACC is 7.917%.

This WACC can be used by Anepsa to evaluate the viability of its investment projects, for example, if Anepsa is considering a new project with an expected rate of return of 8%, the project would be considered acceptable, since its rate of return exceeds the Company WACC.

Balance sheet or net book value method for company valuation

For this method, all assets of the business are considered in order to calculate its value, taking into account the accounting balance, but the history or evolution that the company may have in the future is not considered. Some of the most used methods are adjusted value, actual net assets, liquidation value, substantial value and book value.

Goodwill method in business valuation

For this method, the value of intangible assets that are not taken into account in the balance sheet must be taken into account, such as the brand, reputation and image of the company. Here, both the current situation and future estimates are considered. . It is possible to make the calculation using the classic method, the abbreviated income method or also that of the union of European accounting experts.

What is the purpose of valuing a company?

Find ways and accurate ways to identify, measure the economic / operational relationship of a company based on current and future business conditions in a set of internal and external factors.

It has to be done an analysis of administrative, legal and financial, commercial, operational and market characteristics,

Through it, you can find the profile of products and services, as well as the market opportunities and limitations offered by the company itself, as well as its strengths and weaknesses.

The main factors are:

  • economic
  • By competitive positioning of the business within the sector
  • Business operation characteristics
  • Motivations of economic agents

The main purposes of valuing a business can be to:

Analysis of investments, acquisitions, placement of capital on the stock market, mergers, to evaluate and remunerate managers, compensation, dation in payment, reengineering, merger-absorption, company dissolution, administration and planning.

Benefits of valuing a company

Usually a business can have different values according to who values it, so the main benefit of doing a company valuation study is to have a partial parameter that is as impartial as possible, to make decisions in favor of investors, owners or beneficiaries.

The benefits of valuing a company fall and are born in the general purpose and objective of the interested parties, that can arise from the need to calculate the range of value that seek to be a reliable reference in a negotiation between parties, may also be subject to the objective of identifying opportunities to invest when making an assessment of indicators, or value drivers that may be of interest to the potential buyer, another purpose may be to identify the economic value on certain dates to buy at appreciation or depreciation in the capacity of "value creation."

The benefits of carrying out a company appraisal are diverse and provide very useful information for decision making:

  • Provide the recent value of the company as a going concern for stock exchange.
  • Specify a company value status
  • Restatement of financial statements
  • Financing or credit
  • Buy and sell
  • Warranty

The benefits of the Service that ANEPSA Guarantees when valuing a company are:

  • Analysis of the general characteristics of the company
  • Analysis and commercial characteristics
  • Analysis of technical and operational characteristics
  • Analysis and administrative-financial characteristics
  • Going concern valuation methods

The added value in ANEPSA is:

  • Experienced Staff
  • Transfer of knowledge for the benefit of the administration of your company
  • Timely service delivery
  • specialized treatment
  • Constant update about this service
  • continuous attention
  • Availability to move anywhere in the republic

At ANEPSA we are here to help you, contact us

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