Company Valuation

It is a set of procedures followed to economic value of a company. It is usually calculated by the financial institution to find out the value they can pay to buy back a company from its owner. These valuations are usually performed during the process of merger and acquisition. The situation surrounding the company must be analyzed before starting the company valuation process. The situation plays a major role in determining the value of a company. For ex if the condition of the market is worse then the value of the company drops, whereas if the economic condition is stable then even a company in bad shape will fetch more value.

The first and foremost method that is being adopted in company valuation is elements of business evaluation method. Some of the elements in the company valuations using the method of elements of business evaluation are,

• Economic condition is the prime factor that determines the value of a company. If the economy is good then the value will be greater, whereas if the economy is bad then the value will be less.
• Financial analysis includes ratio analysis, trend analysis, industry comparative analysis and common size analysis. In this case the analyst compares the performance of the company with the other company in the industry to find out where the company being analyzed leads and where the company being analyzed lags. When the current data of company to be analyzed is compared with the data of its earlier performance it gives the growth rate of the company.  
• Normalization of financial statement is a process in which the company’s asset worth is calculated in case of bankruptcy after paying the liabilities.  

Another method of valuating a company is Asset based approach. In this method the only consideration is asset while determining the company value. It is the most irrational method in analyzing the company value. The major drawback in this method is that the other factors are not taken into consideration while calculating the asset value.

The final method that is being used to determine the value of the asset is Market approach. In this method the value is determined by comparing the company with the other similar company in the market and thereby determining its price.

Question

• What are the three major methods to determine the company value?
• What are the need for the evaluation of a company?