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Stock Valuation Methods Part 2 – Asset Based Valuation

Asset Based Valuation

Another way to value a company is to add up the value of the assets it has and remove the value of the debts and obligations.  This Asset Based Valuation concept is simple in theory but complicated in practice as it is difficult to obtain the market value of the assets and liabilities for even a small company.  With that there are ways we can look at the company and determine its value using it’s balance sheet and its historical price to book ratio as we introduced above.

We will cover 2 asset based valuations both based on the same foundation:

Adjusted Book Value:

In the first method we look to adjust the balance sheet to reflect market values from the book values (we call this adjusted book value) presented there.  We can try and do this line by line if we are very familiar with the company or we can look at historic price to book ratios and apply them to the current balance sheet to adjust those book values to market values.

The second method builds on the first: Once we have calculated an adjusted book value for the company we can determine the value that is available to common shareholders if the company was going through a liquidation by removing costs associated with a bankruptcy.

image of Asset Based Valuation Slide

Figure 12. Asset Based Valuation Method

Let’s start with a simple example of adjusting the book value as you see in Figure 13.

image of asset based valuation adjusted book value slide

Figure 13. Adjusted Book Value Approach

Liquidation Value:

Next we look at the same company if it was undergoing a liquidation (or bankruptcy). We start with the adjusted book value and add or remove revenues and expenses associated with a liquidation.  In the example below we show line items like:

Disposition costs: costs incurred to sell the assets of the company

Profit or Loss during liquidation: Net income or loss experienced during the liquidation

Liquidation Costs: these can be other costs associated with the liquidation including selling inventory at a discount or walking away from receivables

Taxes: if there is revenue being generated during the liquidation there may be a tax implication that we need to account for

image of asset based valuation liquidation value slide

Figure 14. Liquidation Analysis

So in the example above we had a book value of $1.00 per share, a Market value of $1.80 per share and a liquidation value of $0.49 per share.  It is obviously important if we invest in a company like this we want to see it ongoing and not go through a liquidation.

In the next article we will discuss Comparable Vauations…….

By | 29 March, 2018 |

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