Company analysis

Company analysis

Often at Lotus Amity we are engaged to value the equity held in a company that operates the business.

If the business is profitable, the usual way we value the shares is to first value the business (often referred to as the enterprise value)and then make certain additions and deductions to arrive at the value of the equity in the company.

Business Value + Surplus Assets – Surplus Liabilities – Market value of debt – Market value of Options = Value

Surplus assets and liabilities

The business value is the value of the operational business and comprises of components such asthe 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 business, 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 cash flows based on 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. For example, the Company may have acquired a significant level of inventory just prior to the valuation date and so workingcapital is significantly above what would be considered normal operating requirements.

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. Debt may also include convertible notes.

Other deductions

Other deductions to arrive at equity value may include deducting options and preference shares.