Corporate Valuation Model

Asset based Valuation Model

Asset-based valuation is a method of determining the value of a company based on the value of its assets. It is commonly used for companies with tangible assets such as property, plant, and equipment (PP&E).

The basic formula for asset-based valuation is:

Total value of assets – Total value of liabilities = Equity value

The total value of assets is calculated by adding up the current market value of all of the company’s assets, including PP&E, inventory, accounts receivable, and any other assets the company may own. The total value of liabilities is calculated by adding up all of the company’s outstanding debts and other liabilities.

The resulting equity value represents the estimated value of the company’s equity, or the value of the company that would be left over if all of its assets were sold and all of its liabilities were paid off.

One limitation of asset-based valuation is that it does not account for intangible assets such as intellectual property, brand value, or customer relationships, which can be difficult to value. Additionally, asset-based valuation may not be appropriate for companies with high levels of debt or with significant intangible assets.

Overall, asset-based valuation can be a useful tool for valuing companies with tangible assets, but it should be used in conjunction with other valuation methods to ensure a comprehensive and accurate valuation.

Earning Based Valuation Model

Earnings-based valuation is a method of determining the value of a company based on its expected future earnings. This method is commonly used for companies that are expected to have stable or growing earnings over time.

The basic formula for earnings-based valuation is:

Estimated future earnings x Price-to-earnings (P/E) ratio = Company value

The estimated future earnings are calculated by projecting the company’s future earnings over a certain period of time, typically five to ten years. This projection is based on factors such as historical performance, industry trends, and economic conditions.

The P/E ratio is calculated by dividing the current market price of a share of the company’s stock by its earnings per share (EPS). This ratio provides an estimate of how much investors are willing to pay for each dollar of the company’s earnings.

Multiplying the estimated future earnings by the P/E ratio gives an estimate of the company’s total value.

Other earnings-based valuation models include discounted cash flow (DCF) analysis, which involves estimating the future cash flows of the company and discounting them to present value, and the dividend discount model (DDM), which involves estimating the future dividends of the company and discounting them to present value.

Earnings-based valuation models have some limitations, including the difficulty of accurately predicting future earnings and the fact that they do not account for other factors that may affect a company’s value, such as changes in industry trends or regulatory environments. As with any valuation model, it is important to use multiple methods and to consider a range of factors when determining the value of a company.