A Guide on How to Calculate Company Valuation in 2023

You're ready to grow your business or maybe want to sell it in the future for better ventures. Whatever you're reason, knowing how to do valuation of a company is an important skill every business owner should have. Unfortunately, there are many methods out there and it can get confusing as to which is the best. 

Here is a guide on how to calculate company valuation and everything else you need to know below.

Did you know? Company valuations are needed to settle false tax reports, financial disputes, and for various legal mitigations, not just for sales or buy-ins!

What is Company Valuation?

Company valuation or business valuation is an estimate of the total value of the organization. This includes taking into consideration factors such as total assets, yearly income, debt liabilities, and other financial revenue streams. A company's valuation tells investors about its worth as a business. The valuation process is used for generating sales and tax reports as well at the end of the financial year.

A business valuation is important because it tells us about the company's financial health. There are various instances where the value of a company is required such as business dealings, litigations, shareholder disputes, economic changes, tax reporting/filing, and for preventing fraud.

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How to Calculate Company Valuation

There are several methods you can use if you want to learn how to calculate company valuation. The most common way is to subtract liabilities from assets and find out net worth. However, this isn't always accurate and doesn't give a full view of the company's financial standing.

Here is a list of the top six valuation methodologies that will give in-depth insight on how to value a company.

1. Book Value

You can find most balance sheets of publicly traded companies online. Refer to the balance sheet of your company to find out the company's liabilities. Subtract the liabilities from assets to calculate the equity of ownership. Now you are left with only intangible assets. Exclude them from the total value amount and you get an estimate for the value of all tangible assets the company owns. The downside to this method is that it's too simplistic which makes it unreliable. However, it works for some organizations that are just starting up.

For example, suppose the a company’s liabilities are ₹10,000 and total assets are ₹1,00,000. Then, ₹1,00,000 - ₹10,000, gives you the ₹90,000, which is the equity cost of ownership. Now, subtract the intangible assets of ₹5,000, which leaves you with ₹85,000 in tangible assets, which is the book value.

2. Market Capitalisation

Market capitalization is one of the easiest models implemented on how to calculate company valuation. It multiples the total number of shares in a company with current share price.  The model is very reliable, straightforward, and this is because there is no uncertainty about the number of shares outstanding.

For example, consider a company with 10,000 shares of face value ₹10. The market value of a share is ₹20. Therefore, 

the market capitalisation = total number of shares x market value of a share

Ie, market capitalisation = 10,000 x ₹20 = ₹2,00,000

3. Discounted Cash Flows

If you're still wondering how to calculate company valuation, the third method is discounted cash flows. Discounted cash flows calculate the future value of a company by analyzing the amount of revenue it is expected to generate in the future.

The formula for calculating discounted cash flows is as follows:

Discounted cashflow = First Year Cashflow/(1+r)^1+Second Year Cashflow/(1+r)^2+.....

Where r = rate of interest (also known as weighted average cost of capital)

It takes a look at cash flows generated by company in the present and computes their future value by taking discounted rates and time periods for analysis. 

The accuracy of this model depends on the terminal value which makes assumptions about future revenue growth and discounted rates. The disadvantage of this model is that if the market is prone to sudden swings or fluctuations, the company's value will be determined by it. 

For example, consider a company making an investment of ₹10,00,000 for 5 years. The weighted average cost of capital is 6 per cent. The estimated cash flows are as follows:

Therefore, using the formula, the discounted cash flow will be -

Had the company gone ahead with the investment, they incurred a loss of ₹2,75,387.

4. Enterprise Value

To learn how to calculate net worth of a company, you can use enterprise value. This is done by adding debt to equity and subtracting the total cash not used for financing business operations from the resulting number. 

Big companies like Ford, General Motors, and others have used it.

To illustrate how it works, take Ford for example. The company had a market capitalisation of ₹3.36 lakh crores, ₹15.65 lakh crores in outstanding liabilities and a cash balance of ₹1.19 lakh crores. Ford's total enterprise value was calculated to be ₹17.82 lakh crores after including all figures. Tesla is another company that used the same model for finding out its value, but the main difference is that Tesla was funded by equity more as compared to other brands.

5. Multiply Revenue

Revenue gives a total measure of how much money a business brings. It multiplies using figures like 0.5 and 1.3 and multiplies them with the company's annual sales numbers. Business analysts may set an upper limit for estimating the total value of the company using this formula. The number for the multiplier used depends on the industry and the use case of the business.

For example, if a company’s revenue is ₹1,00,000 and the industry figure is 2.5, then the company will be valued at,

₹1,00,000 x 2.5 = ₹2,50,000

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What Data is Required to Do A Company Valuation?

Each scenario is different, and not every company's valuation will be the same. However, certain items are foundational to the valuation process, and they are:

• Profit and loss statements
• Balance sheets dating back to at least 5 years
• Corporate tax returns for the last 5 years
• Information about inventory, assets, and liabilities
• Current year revenue forecasts and financial projections

Hire a Professional

If you're trying to calculate your company's value solo and it is your first time, you may be doomed to fail. It's advisable to hire a professional in these situations and seek out their help. This is because a professional business analyst or expert is well-versed with changing market conditions and knows which of the best multipliers to use. They are familiar with balance spreadsheets and recent comparable company analysis and can apply recent sales figures to your business for estimating net worth.

A realistic valuation of your company will speed up the process when it comes to your financial management and business growth. It will also help you adjust your risk appetite and ensure you stay aligned with the current business environment.

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Conclusion:

Finding out the value of your company is not an easy task for those who are new, and it's always easy to forget other variables in the calculation process. Most values for computation can be found in the balance sheets of publicly traded firms. Business valuations are sophisticated, and sometimes firms may find themselves using a combination of approaches instead of sticking to just one model or technique.

Ensuring that the right documentation is in place and having a record of the current year's financials is very important. To get started, you can hire a professional business analyst to do your valuation computation or consult a valuation broker or agent.
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