Value of a Company

The value of a company may be determined using various methods. The most common valuation methods are based on the company’s net asset value and earnings value.

The net asset value is calculated by deducting the liabilities from the assets. Fair market value is normally used in the valuation of the assets and liabilities. The net asset value is particularly affected by hidden legal obligations, such as guarantees, tax liabilities, credit losses and transfers of proprietary rights. The value of the company may be reduced by, for instance, the fact that patents used by the company are held by private individuals.

Earnings value is established by calculating the average operating result of the company and by estimating its future operating result. The earnings are discounted to present value by applying the desired interest rate. Determination of the earnings value aims to establish the actual expected profit level of the company. In addition to these two valuation methods, valuation may be carried out, for example, by determining a relative market value compared to companies in the same business sector, or by establishing cash-flow value, liquidation value or insurance value.