The process of valuing a company can seem like an intimidating task to many people, but it doesn’t have to be that way at all. In fact, if you take the time to learn the four basic steps involved in valuing a company, you’ll be able to do it without much stress or effort at all! Here’s How To Value A Company in just four simple steps:
Step 1: Find The Assets
The most important thing to understand when it comes to valuing a company is that you’re not buying its future, you’re buying its assets. The most important part of any business is its tangible assets, or what an owner can touch and see (e.g., office equipment, cash, etc.). If a business has been profitable in recent years, you should expect to see substantial increases in these assets over time.
These are also referred to as hard assets because they are physical objects that cannot be changed or altered by external forces. There are two types of hard assets—current and fixed. Current assets include things like inventory, receivables, short-term investments, supplies, and cash on hand. Fixed assets are long-term investments such as property, plant equipment (PPE), tools machinery used for production purposes.
Step 2: Determining Its Net Operating Profit After Tax (NOPAT)
Next, you’ll want to calculate NOPAT, which is basically what’s left over after a company has paid all its expenses and taxes. To do so, you’ll need to identify a company’s EBITDA (or earnings before interest, taxes, depreciation and amortization) along with its other non-cash costs. It’s also worth mentioning that different industries are affected by different costs – for example, construction companies will have higher depreciation costs than retail companies.
Step 3. Determine Fair Value
After you determine How To Value A Company and what it’s worth, you need to estimate how much that value will be in six months or a year. After all, we invest for the future, not today. There are many factors at play when determining a fair value for a stock; however, there are two key valuation models that investors can use to get an idea of where a stock could go in coming years.
These models are discounted cash flow (DCF) and price/earnings (P/E). Let’s look at each model individually. A discounted cash flow model calculates a stock’s fair value by discounting expected future cash flows. This method assumes that all investments carry risk and thus require some form of return—in other words, investing $1 million now could result in $2 million after five years if things go well but might also result in just $800,000 if things don’t work out as planned.
Step 4. Weighted Average Cost Of Capital (WACC)
This is calculated by taking a company’s debt and equity, dividing it into its market capitalization, then multiplying that percentage by an industry’s required rate of return. This will give you a rough idea of what someone should pay for your company given your industry. If it’s higher than what they are offering, walk away. If it’s lower than their offer, run to get your lawyer. It may not be perfect, but it can help you gauge whether or not something is a good deal.
Conclusion
The four steps above are a great place to start as you begin learning how to value a company. However, remember that each company and scenario is unique. If you’re just starting out, don’t be afraid to ask for help; there are countless resources out there that can offer valuable insight.
