Asset Valuation

The process of determining the value of an asset such as stocks, bonds, buildings, machinery, land, etc.

Asset valuation is the process of determining the value of an asset, such as stocks, bonds, buildings, machinery, land, etc.

Asset Valuation

For stocks, it is determined by using book value and various valuation models like discounted dividend model, discounted free cash flow model, etc. The assets are generally classified into two types: tangible and intangible assets.

Asset valuation is the process of determining the fair market value of an asset. It involves valuing tangible and intangible assets through subjective and objective measurements. 

Tangible or Capital Assets can be directly valued with the help of their book value and replacement costs.

Valuing intangible assets, such as brand value, goodwill, synergies, etc., can not be measured directly as their valuation is subjective and difficult to calculate.

Valuation is the most common way of assessing the worth of an asset:

  • Utilizing a model because of the factors the examiner trusts impacts the significant value of an asset.
  • Contrasting it with the perceptible market worth of comparative assets.

Valuing tangible Assets

Tangible assets are assets that are present in physical form. They are categorized as cash, properties & buildings, machinery, etc. They can be easily valued using their book values and their replacement value.

Net Tangible Assets, also known as Net Asset Value, are a company's book value after subtracting intangible assets and liabilities.

  • Net Asset Value 

It is the other word for net tangible assets and is calculated as the book value of a company's tangible assets after subtracting net intangible assets and liabilities. This is the minimum worth of a company and becomes very important when a company is diluted.

The market value of a company dramatically differs from its book value because it is calculated at historical costs.

Net Asset Value = (Total Assets - Total Liabilities) / Total Outstanding Shares

Valuing Intangible Assets

Intangible Assets are a company's assets that are not visible in the physical form but are beneficial to a company. They can be in the form of goodwill, patents, trademarks, etc. Intangible Assets become very important when valuing a company at its liquidation.

Intangible assets are calculated by subtracting a company's book value from its market value. The worth given by intangible assets should be caught in big business valuation.

Experts must extend the scope of information sources and procedures they use in valuation and foster reasonable approaches to the esteemed immaterial resource for more solid valuation results.

Such techniques give new points of view on the expense, market, and pay drawing near and can be incorporated into the analysis.

Distinguishing and esteeming intangible assets is fundamental in a functioning administration structure, yet additionally in factor investing and quantitative demonstrating in passive techniques that depend on financial reports and might require comparability changes.

NOTE

The worth of intangible property rights relies upon the conditions of a given overall setting. Therefore, dissecting the intangible property based on its utilization, the market, and contenders is vital.

Asset Valuation Methods

There are various methods to value different assets based on their cash flows and cost of capital.

Some methods are listed below:

1. Discount Dividend Method

This method uses a mathematical formulation and values a stock's price by discounting future dividends to present value. If the stock price comes out to be higher by this method than the current market price, then the stock is said to be undervalued.

2. Discounted Free Cash Flow Method

This method uses the future cash flows of a company and calculates its present value using discounting the weighted average cost of capital to value a company.

3. Residual Income Valuation Method

This method considers net cash flow receivable to a company and values the company as the sum of its book value and the present value of future residual income. A company can have a positive net income but a negative net residual income.

4. Asset Accumulation Valuation Method

According to this method, a company's assets and liabilities are compiled and assigned a value. The asset value of a particular identity is the difference between its assets and liabilities. This method requires a careful way of setting values to assets and liabilities.

5. Excess Earnings Valuation Method

Along with determining tangible assets and liabilities, this method also calculates the goodwill of a company.

To decide altruism, the profit of a business is dealt with like info, and afterward, an association is attracted to the payment strategy. The excess earnings technique is exceptionally favored while esteeming solid organizations with significant generosity.

This method is generally used by companies providing professional services like law and accounting firms, architectural firms, medical services firms, etc.

6. Relative valuation method

This method uses the value of similar assets to value a particular asset. For example, price multiples like price-to-earnings ratio, price-to-book value ratio, and price-to-cash flow ratios are used for valuing publicly listed companies. This method is also used to value illiquid assets like private companies with no market price.

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Uses of Valuation Models

The following are the uses:

1. Stock selection:

The most direct use of valuation models is to direct stocks' buying, holding, or offering. Valuation depends on an examination of the inherent worth of the stock with its market cost and a correlation of its cost with that of equivalent stocks.

Example

While selecting a stock, if using a valuation model, the stock's price comes out to be higher than its current market price, then it is worth buying because it may be trading at a discount.

2. Reading the Market:

Current market prices implicitly contain information about the future value of the variables that influence the stock's market price.

Example

The market can be read using the asset valuation as it gives the values of valuation ratios or multiples at the current market price of a stock and by which we can predict whether the stock or market has a potential for future growth.

3. Fairness Opinions:

Analysts use valuations to support professional opinions about the fairness of a price to be received by minority shareholders in mergers and acquisitions.

Example

During any merger and acquisition deal, valuation help in determining a fair price for the deal, as by asset valuation, one can evaluate the valuation multiples and check for a reasonable price.

4. Planning & Consulting:

Many firms connect with examiners to assess the impacts of proposed corporate systems on the company's stock price, chasing after just those with the best worth to the investors.

Example

Companies take advice from advisors to calculate the financial benefits of different corporate actions, including dividends, bonuses, fundraising, and purchasing properties and equipment.

5. Private Businesses Valuation:

Examiners use valuation strategies to decide the worth of firms or holdings in firms that are not public. Financial backers in non-public firms depend on these valuations to determine the value of their positions or proposed positions.

Example

VCs and private equity firms often use this method to determine the risk and return of any investment they plan to make.

6. Portfolio Management:

Valuations can be more valuable when used in a portfolio management context to determine the value and risks of a portfolio of investments.

Example

Portfolio managers examine the valuation of assets periodically to identify the profitability scope of any investment

Importance

All companies regularly access their valuation.

It is imperative for various reasons: 

1. Corporate Merger and acquisitions:

In the corporate world, when two companies merge their businesses, or a company plans to acquire another. In that situation, it becomes essential to calculate at what valuation the deal can benefit both buyers and sellers.

2. Loan applications:

The financial institution asks for an asset as collateral if a company wants to apply for a loan. For that, the particular asset must be correctly valued to check whether it qualifies as collateral or not.

3. Getting the right price:

It is essential in determining the correct price of any asset, specifically when it is to be bought or sold. It helps the buyer to prevent buying any asset at an overvalued price and the seller preventing them from selling any asset at a discount.

4. Tax Payment:

Companies holding any assets are required to pay taxes for them, so the valuation of assets becomes vital as it helps the company to pay the right amount of tax.

Tax Payment

Advantages and Disadvantages

Following are the advantages & Disadvantages:

Advantages:

  • This strategy for valuation can be beneficial when an organization is confronting liquidation issues.
  • One can likewise utilize this technique to esteem firms in the speculation fragment.
  • We can involve this strategy for both value worth and venture esteem, provided that no value is included.
  • Even though this strategy considers the resources and liabilities for valuation, it gives adaptability in choosing the resources and liabilities to consider for valuation.

Disadvantages:

  • Unlike other methods, asset-based valuation disregards a company's prospective earnings. As a result, most companies use appropriate asset valuation methods when planning for company liquidation.
  • The process of measuring intangible assets can be pretty complicated. It requires excellent hard work, accuracy, good knowledge, etc.
  • Dissimilar to other well-known valuation techniques, this strategy doesn't consider the planned income of a firm.
  • As a general rule, a business might neglect to bring the worth it gets based on the asset-based technique when discarding its assets.
  • As said, some wobbly sheet things may likewise be considered in this strategy. Thus, estimating those things could get troublesome.
  • This technique for valuation might sound straightforward. Yet, it has extraordinary involvement, precision, and thoughtfulness in concocting the proper valuation. 
  • Without legitimate information and experience, many organizations cannot get a precise valuation.

Challenges

Challenges

The challenges are:

  • One significant challenge with this valuation technique comes with one necessity to change net assets. As a result, the qualities on the accounting report don't show an honest evaluation since it shows the assets' worth at cost less deterioration.
  • Another issue is that many countenances are certain intangible assets for whom the asset report doesn't mirror the total worth. Or on the other hand, the accounting report doesn't show these intangibles by any means.
  • Also, there are certain intangibles (proprietary innovations) that an organization would have zero desire to esteem. In any case, with the end goal of this valuation, the organization would need to esteem it. Esteeming such intangibles could likewise turn into a test for the organization.
  • Finally, a firm may likewise confront while making acclimations to liabilities. Making market esteem acclimations to liabilities could raise or empty the worth of liabilities. In addition, this would ultimately affect the changed net assets computation.

Practical Application

Some of the examples are:

Example 01 -

Let's calculate the Net Asset Value of the company ABC ltd. which has the following data:

  • Total Assets - $200B
  • Total Intangible Assets - $10B
  • Total Liabilities - $50B

Formula :

Total Net Asset Value = Total Assets - Total Intangible Assets - Total Liabilities

Now,

Total Net Asset Value = $200B - $10B - $50B = $140B

Example 02 - 

Consider a company having total assets of $114M and tangible assets and total liabilities of $5M and $20M, respectively. In addition, the company has 20M outstanding shares.

In this example, we will calculate the total net asset value and net asset value per share for the given company.

Now,

Total net asset value = total assets - total intangible assets - total liabilities

= $114M - $5M - $20M = $89M

Now, we will divide total NAV by outstanding shares for net asset value per share.

Net asset value per share = $89M / 20M = $4.45

Conclusion

Valuation of Assets implies deciding the monetary worth of an asset. In fact, to set up a fair fiscal summary, the right asset valuation is an unquestionable requirement, as we can't determine the right benefit and loss of the organization without it. 

It's the obligation as well as the culpability of an evaluator to ensure that the assets show their actual worth in the financial summary toward the year's end.

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Researched and  authored by Kavya Sharma | LinkedIn

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