When analyzing a company's financial health or planning to buy it, estimating its value is a critical step. Unfortunately, an entire company cannot be valued as easily as calculating a smaller, more liquid system, such as equities. However, there are various methods of estimating a company's market value with some accuracy. These methods take into account elements such as the company's stock value, comparable sales analysis, and analysis of the company's balance sheet.
Steps
Method 1 of 1: Calculate the Market Value of a Company
Step 1. Calculate a company's stock capitalization to estimate its value
The most effective and immediate method to determine the market value of a company is to calculate what is called the share capitalization, or the total number of outstanding shares. Note that this method only applies to publicly traded companies, where the value of the shares can be easily determined.
- Start by determining the number of outstanding shares and then multiply this number with the current share price to determine the share capitalization. The result represents the total value of the investors' shares and gives a fairly accurate picture of the overall value of the company.
- As an example, consider Anderson Enterprises, a publicly traded telecommunications company with 100,000 shares outstanding. If each share is currently worth $ 13, the company's stock capitalization is $ 1,300,000 (100,000 x 13).
- To find the number of shares outstanding and the current share price, you can consult financial analysis sites such as Google Finance and Yahoo Finance.
- However, this method has the disadvantage of making the value of a company subject to market fluctuations. If the stock market falls due to an external factor, the company's stock capitalization will fall as well, even if its financial health has not changed.
Step 2. Analyze recent trades and mergers to estimate the value of a company
This valuation method is very effective if the company is private or if the stock capitalization estimate is considered unrealistic for some reason. To calculate the market value of a company, one needs to look at the selling prices of comparable companies.
- There is a certain margin of discretion in choosing which companies are comparable. Ideally, the companies being considered should belong to the same industry and be approximately the same size as the company being evaluated. Furthermore, sales prices should be recent in order to reflect market conditions as up-to-date as possible.
- After finding the recent sales of comparable companies, one needs to average all their sales prices. This average can be used to estimate the market value of the company in question.
- For example, imagine that three current mid-sized telecommunications companies recently sold for $ 900,000, $ 1,100,000, and $ 750,000. The average of these three retail prices is $ 916,000. This would seem to indicate that Anderson Enterprises' share capitalization of $ 1,300,000 represents an overly optimistic estimate of its value.
- This method has some flaws. First, it may be difficult to find enough data, as trading of comparable companies may occur infrequently. Furthermore, this valuation method does not take into account significant differences between the sales of the companies, such as in the case of companies sold due to economic difficulties.
Step 3. Estimate a company by considering the resources it possesses
In some cases, the value of a company can only be reasonably ascertained by looking at its balance sheet. This method is very useful when evaluating a holding company or an investment company, where the total investment value of a company can be used as a measure of the value of the company itself.
Imagine Anderson Enterprises has a net worth of $ 1,100,000. If these resources consist mainly of investments in other companies, then this result is a reasonable estimate of the total value of Anderson Enterprises
Step 4. Evaluate a company using the multiplier method
The most appropriate method for evaluating small companies is the multiplier method. It takes an index of revenue, such as total gross sales, total gross sales, and inventory, or net profit, and multiplies it by an appropriate coefficient to obtain the company's value.
- The coefficient used will vary according to the sector, market conditions and any particular situation within the company. The definition of this number is quite arbitrary, but a good result can be obtained by consulting a trade association or financial advisor.
- For example, imagine that the appropriate multiplier for a mid-sized telecommunications company is 0.8 x net profit. If Anderson Enterprises' net profit this year is $ 1,400,000, then the multiplier method puts the company's value at $ 1,120,000 (0.8 x 1,400,000).
Advice
- The reason for your assessment should influence the weight you assign to a company's market value. If you are considering investing in a company, your primary concern should be its rate of growth, not its total value or size.
- Sometimes the term "Enterprise Value" is used to describe the overall price of a company purchase. This result will generally be higher than the company's market value, as determined above.
