Balance sheet analysis provides several ways to examine a company's total value. Evaluate companies by examining their balance sheets for potential cash flow and asset values. Compare the balance sheet analysis to its stock market value and find the company's market value as a going concern. It is very important to understand that there is no one way to compute the total value of a company. Use the technique most relevant to your needs.
Use a spreadsheet program to calculate the total assets and liabilities from the company balance sheet. Subtract liabilities from assets to get net worth. This represents both the raw value of the company's worth were it to be liquidated and its name recognition value (also called the company's value as a going concern). Subtract from the net worth any goodwill listed on the balance sheet. The result is book value. Book value represents the realizable worth of the assets after paying all creditors.
Multiply the book value by a discount for each asset to find a company's liquidation value. This is the company value were it to be liquidated in an auction. This assumes the company has no value as a going concern and that all assets can be turned to cash. This is the realizable total value of a company. It is a worst-case scenario of prices. This can be calculated as a three-column spreadsheet: asset value, liquidation value and results of multiplying column 1 by column 2.
Measure the cash flow generated by the company before taxes, interest and amortization. Like a bond that pays interest, choose how much you would pay to receive that cash flow into the future. Adjust the number for possible earning changes. The sum that approximates the amount needed for cash flow is the company's worth.
Compute a market value by multiplying the number of shares by the current stock price. This is the total market value of the company. Use this number to gauge the value of the company relative to the value computed in a balance sheet.
Use a going-private value of a public company to estimate what its worth would be if the company were to be taken private and cost-cutting management introduced. This estimate of total value relies on strategically selling nonessential assets, cost cutting and realignment of product sales. This price is typically higher than stock market values and realizes that large public companies often have assets that are not deployed as usefully as possible. This value represents a "best case" of true value, because it presumes increased earnings and cash from unnecessary assets.
Total company value should always be looked at in terms of what a company can do more profitably and what assets a company can best convert to cash.
- Total company value should always be looked at in terms of what a company can do more profitably and what assets a company can best convert to cash.
After an 18-year career on Wall Street as a trader of municipal and mortgage backed securities, Carmelo Montalbano developed a very large desktop trading application that managed more than 30 institutional portfolios. Technology and small business acquisitions continue to be his primary interest.