If you want to invest in a company, or sell a company, you will need to calculate the value of the company to find out the face amount. The market value of a company is a reflection of investors' expectations of the company's profits in the future. Unfortunately, the entire business unit cannot be assessed easily, in contrast to current assets such as the value of company shares. However, there are several ways to measure a company's market value that can fairly accurately reflect the company's actual value. Some of the methods discussed in this article involve a company's market capitalization (the value of shares and shares outstanding on the market), analysis of similar companies, or using an industry wide multiplier to determine market value.
Step
Method 1 of 3: Calculating Value Using Market Capitalization
Step 1. Determine if market capitalization is the best valuation option
Market capitalization is the easiest and most reliable way to determine a company's market value. Market capitalization is a reflection of the total value of all shares outstanding in the market. Market capitalization is defined as the value of a company's shares multiplied by the total number of shares outstanding. This value is used to measure the size of the company as a whole.
- Note that this method can only be used for go-public companies, aka listed on the Indonesia Stock Exchange (IDX) because the value of their shares can be determined easily.
- The disadvantage of this method is that the value of the company is affected by market changes. If the company's stock declines due to external factors, the company's market capitalization will also decrease even though the level of financial health does not change.
- Market capitalization also depends on investor confidence and as a result its value is volatile and less accurate to measure the actual value of the company. Many factors affect the value of a company's stock so that its market capitalization is also affected. Therefore, you should remain careful. However, potential buyers of a company will have similar expectations of the market and measure the same value against the potential profit of the company.
Step 2. Determine the company's current stock price
The company's stock price is published on many sites such as Bloomberg, Yahoo! Finance, and Google Finance. Try searching for the company name followed by the word “stock” or its share symbol (if you know one) on the Google search engine to find this information. The stock value that will be used for this calculation is the current market value of the stock, which is usually clearly displayed on the stock report page.
Step 3. Find the number of shares outstanding
Next, you have to find out how many shares of the company are outstanding in the market. This value reflects the number of shares owned by shareholders, both inside (eg employees or members of the board of directors) and outside the company (eg external investors such as banks and individuals). This information can be found on financial websites or on company balance sheets, under the account name “Capital Stock”.
By law, all companies listed on the IDX provide financial statements (including balance sheets) for free on the internet. You can simply search on a search engine like Google
Step 4. Multiply the number of shares outstanding by the current share price to determine the market capitalization
The multiplication result reflects the total value of all investors' ownership of the company, which provides an overview of the company's overall value.
For example, the company Andre Tbk. which is engaged in telecommunications and listed on the IDX has 100,000 outstanding shares. If the price of each share is IDR 13,000, the market capitalization is 100,000 * IDR 13,000 which is IDR 1,300,000,000
Method 2 of 3: Finding the Company's Market Value Using Similar Companies
Step 1. Determine whether this assessment method is the most appropriate
This method is most appropriate to use to assess private companies or the company's market capitalization value is unrealistic for some reason. To estimate a company's value, look at selling prices at other similar companies.
- The market capitalization value of the company is unrealistic if the company's value is mostly in intangible assets and the behavior of investors who are too confident or speculate so that the price is far above the rational limit.
- This method has several drawbacks. First of all, the data needed is quite difficult to find, because the selling price of similar companies is quite rare. In addition, this valuation method does not consider significant differences between business sales, for example whether the company was sold under duress.
Step 2. Find similar companies
There are many provisions in determining which companies are similar to the companies that want to be assessed. Ideally, companies should operate in the same field, be of similar size, and have similar sales and profit figures. In addition, the sales transactions that took place were still relatively new, thus reflecting the current market conditions.
You can also use a similar public company. This is easier to do because you can find the market value using the market capitalization method on the internet
Step 3. Create an average selling price
After finding the latest sales from similar companies, average all the selling prices. This average value can be used as an initial estimate of the market value of the company being assessed.
- For example, let's say that recently there were 3 medium-sized telecommunications companies that were sold for Rp900,000,000, Rp1,100,000,000 and Rp750,000,000. Average the three selling prices to get a result of IDR 916,000,000. Thus, the market capitalization of Andre Tbk. Rp1,300,000,000 is an overly optimistic estimate.
- Perhaps you should weigh the different values based on their proximity to the target company. For example, if one of the companies is similar in size and structure to the target company, we recommend that you add weight to the sales value of this company when calculating the average selling price. For more details, see How to Calculate a Weighted Average.
Method 3 of 3: Determining the Market Value of the Company Using the Multiplier
Step 1. Determine whether this assessment method is the most appropriate
This method is most appropriate for assessing small business units. this method takes a revenue figure, such as gross sales, gross inventory, or net profit, and multiplies it by the appropriate coefficient to determine the market value of the business unit. This method is best used as a rough initial assessment of the company because it ignores many important factors that determine the actual value of the company.
Step 2. Find the required financial figures
In general, valuing a company using the multiplier method requires an annual sales (or revenue) figure. Total asset value figures (including the value of all current inventory and other holdings) and profit margins will also help estimate the value of the company. All of these figures are usually available in the financial statements of public companies. However, you need permission to access this information on a private company.
Sales or revenue figures, along with commissions and inventory expenses, are reported on the company's income statement
Step 3. Find the appropriate coefficient
The coefficients used vary based on industry, market conditions, and specific business concerns within the industry. These numbers are randomly generated by nature, but exact numbers can be obtained from trade associations or business experts. One good example is the “standard rule” rating from BizStat.
The source of the coefficients will also determine the appropriate financial numbers used in the calculations. For example, total annual profit (net income) is the most frequently used starting point
Step 4. Calculate the market value using the coefficients
Once the required financial figures and the appropriate coefficients have been obtained, simply multiply the two to find the rough value of the company. Again, keep in mind that this value is a rough estimate of the company's market value.
For example, let's say the appropriate multiplier for a midsize company is 1.5 x annual revenue. If Andre's total income this year is IDR 1,400,000,000, then the result of the multiplier method is (1, 5 x IDR 1,400,000,000) is IDR 2,100,000,000
Tips
- The reason for your evaluation should affect the weight given to the market value of the company. If you want to invest in a company, your main concern should be calculating the CAGR of the company, not the total value or size of the company.
- The market value of a company can differ greatly from other measures of company value, such as book value (value of net tangible assets minus liabilities) and enterprise value (another benchmark that considers the value of a company's debt) due to variations in bonds payable and other factors.
