It is the value of the assets owned by a company
What Is an Asset Base?
The asset base is the value of the assets owned by a company. It gives intrinsic value to a business.
However, the value of these assets is generally not static. Instead, it fluctuates because of the appreciation and depreciation of the assets. Also, the total asset base value changes because of the buying and selling of assets.
The features include:
- It is an important factor in terms of the valuation of a company
- It includes fixed assets such as buildings and machinery and financial assets such as cash, cash equivalents, securities, etc
Generally, the asset base of the company is less than the market value of the company. This is because market value includes intangible assets, such as future cash flows.
What is Book Value?
A company's book value is essentially the net value if all the assets are sold and liabilities are paid off. Book value is generally used interchangeably with asset base.
A company’s book value is located in the company's financial statements (basically in the balance sheet).
Theoretically, book value refers to the difference between the company's total assets and total liabilities.
The equation for book value can be shown as:
Book Value = Total Assets - Total Liabilities
Sometimes analysts or accountants exclude the value of intangible assets from the book value because sometimes, the value of intangible assets can’t be realized.
For example, Company ABC has a total asset value of $10 billion and a total liability value of $8 billion. Therefore, the book value of the company is $2 billion.
This indicates that if the company sells off its assets and pays down its liabilities, the equity value of the business would be $2 billion.
Now, let’s look at an example through a mock balance sheet:
|Particulars||Amount (in $ million)|
|Cash And Cash Equivalents||25|
|Land and Buildings||350|
|Short Term Debt||70|
|Long Term Debt||600|
|Other Non-Current Liabilities||20|
Book Value = $910 Million - $740 Million = $170 Million
What is Asset-Based Valuation?
This is also commonly used for company valuation purposes. It gives a transparent picture of what the company owns and owes.
The formula for this method of valuation resembles the formula of this itself. However, it includes the value of items that are not recorded in the balance sheet but, rather, in the footnotes of the balance sheet, such as patents and contingent liability.
Given items of Company ABC,
|Book Value of Total Assets (current assets, plant, and other assets like investments)||$20|
|Total asset value derived after adding the fair value of each item in the asset list||$25|
|Fair Value of Intangible Assets||$7|
|Total Fair Value of Assets||$32 ($25 + $7)|
|Total Book Value of Liabilities (Bank Overdraft and creditors)||$23|
|The total fair value of Liabilities||$28 ($23 + $5)|
Total Owner’s Equity, or Valuation = ($32 - $28) = $4
Asset-based Approach vs. Cost-based Approach
The asset-based and cost-based approaches are both pricing or evaluating an asset.
An asset-based approach is more beneficial while evaluating a business because it can include the value of.
Whereas the cost-based approach is only useful for valuing or pricing a particular asset owned by a business. This is because it can't value intangible assets such as goodwill, intellectual property, etc.
Asset-Based Valuation Vs. Enterprise Value and Equity Value
The asset-approaches are methods of pricing or evaluating an asset.
The asset-based approach is known for its accuracy and simplicity in calculation; however, it is not an appropriate method for valuing a business. This is because it can understate a firm's value if an analyst ignores the value of some or all intangible assets.
In contrast, the enterprise and equity values are appropriate for valuing a business at its market value, as it includes the value of all intangible assets.
Equations for Enterprise Value and:
Enterprise Value = (Price per Share * Number of Shares) + Total Debt – Cash
Equity Value = Enterprise Value + Cash - Total Debt
What does Asset Base indicate?
The base indicates multiple scenarios, such as:
- Although it's common for a company to buy and sell assets for changing business strategies, a large swing in the value of an asset base, be it a huge decrease or increase, with no practical justification as to what management is planning to do with it, acts as a bad indicator for analysts.
- The base is evaluated by banks when considering a company for a loan. A small base implies a low chance of recovering loaned funds in the event of a default.
- It is also an important factor for investors. A disproportionate base can be a red flag for an interested investor.
The asset base is a crucial financial concept when evaluating orof a business. This approach is simple to calculate and gives practical values for making decisions or further projections.
However, there are some drawbacks to this approach which is why it is generally recommended to use this method only when applicable, i.e., when there are little to no intangible assets.
This method can also be used along with other methods of valuation.
Asset Base FAQs
= Total Assets - Total Liabilities
Asset Base = Total Assets -- Total Liabilities
The features are:
- The value of the is not constant.
- It is significant for the of a business.
- Generally, the asset base of the company is less of the company.
Theof a company essentially means the net value of the company if all the assets are sold, and liabilities are paid off.
Yes,is a very important factor in calculating the of a company.
The limitations are:
- depends on the reports of a company which are published in certain intervals (quarterly and yearly). Therefore, stakeholders have to make decisions based mostly on historical data.
- This indicator is not applicable to every type of company or industry.
Thecommonly used for purposes. Valuating a business based on , i.e., assets - liabilities, is the key factor in the asset-based valuation approach.
The cost-based approach is useful for valuing or pricing a particular asset, specifically tangible assets.
The types are:
- Cost-Plus Pricing Strategy
- Break-Even Pricing Strategy
- Markup Pricing
- Target Profit Pricing
The formula is:
= (price per share * number of shares) + total debt – cash