Company analysis

Company analysis

Often a business valuer is engaged to value the shares held in a company. The usual way the value of the shares is derived is to first estimate the business value, often referred to as the enterprise value and then make certain additions and deductions.

Business Value + Surplus Assets – Market value of debt = Value of equity

Surplus assets and liabilities

The business value is the value of the operational business and comprises of components such as:the operating assets of the business, working capital, intellectual property and goodwill. In other words, all the tangible and intangible assets that are required to operate the business.

A company, however, may own assets that are not operational components of the busines, for example, trading investments, a private property or private vehicles. These are referred to asnon-operating assets. They are not required in the operations of the business. They are surplus assets.

Surplus assets may also include surplus working capital. For example, the business value may have been calculated using an average level of working capital over the last twelve months.

To calculate the value of the company, the value of the surplus assets needs to be added to the value of the business.

Deducting debt

Companies are often funded by both equity and debt. Where a company has debt, then to arrive at the value of the equity the market value of debt needs to be deducted.

Market value of equity + Market value of debt = Market value of company