Asset Valuation

408(k) Plan

What is asset valuation?

Asset valuation is the process of determining fair market value or the current value of assets, using book values, absolute valuation models like discounted cash flow analysis, pricing models ‘options or comparables. These assets include investments in marketable securities such as stocks, bonds and options; tangible capital assets such as buildings and equipment; or intangible assets such as brands, patents and brands.

Understanding asset valuation

Asset valuation plays a key role in finance and often consists of subjective and objective assessments. The value of a company’s fixed assets – also called fixed assets or tangible fixed assets – is easy to assess, based on their book value and their replacement costs. However, there are no numbers in the financial statements that tell investors exactly what the value of a company’s brand and intellectual property is. Companies can overstate goodwill during an acquisition, as the valuation of intangible assets is subjective and can be difficult to measure.

Key points to remember

  • Asset valuation is the process of determining the fair market value of an asset.
  • The valuation of assets often consists of subjective and objective valuations.
  • The net asset value is the book value of tangible assets, less intangible assets and liabilities.
  • Absolute value models measure assets based solely on the characteristics of that asset, such as the discounted dividend, discounted free cash flow, residential income, and discounted asset models.
  • Relative valuation ratios, such as the P / E ratio, help investors determine the valuation of assets by comparing similar assets.

Net asset value

Net asset value – also called net tangible capital assets – is the carrying amount of tangible capital assets on the balance sheet (their historical cost minus accumulated depreciation) minus intangible assets and liabilities – or the money that would remain if the company were to be liquidated. This is the minimum that a business is worth and can provide a useful floor for the value of the assets of a business because it excludes intangible assets. A security would be considered undervalued if its market value was less than the book value, which means that the security is trading at a significant discount compared to the book value per share.

However, the market value of an asset may differ significantly from the book value – or equity – which is based on historical cost. And the greatest value of some companies lies in their intangible assets, like the results of a biomedical research enterprise.

Absolute valuation methods

Absolute value models measure assets based solely on the characteristics of that asset. These models are known as discounted cash flow models (DCF) and value assets such as stocks, bonds, and real estate, based on their future cash flows and the opportunity cost of capital. They include:

  • Discounted dividend models, which assess the price of a share by discounting expected dividends at present value. If the value obtained from the DDM is higher than the current trading price of the shares, then the share is undervalued.

  • Discounted free cash flow models calculate the present value of future free cash flow projections discounted by the weighted average cost of capital.

  • The residual revenue valuation models take into account all the cash flows that come back to the business after payment to suppliers and other external parties. The enterprise value is the sum of the book value and the present value of expected future residual income. Residual income is calculated as net income less a charge for the cost of capital. The charge is known as the equity charge and is calculated as the equity value multiplied by the cost of equity or the required rate of return on equity. Given the opportunity cost of equity, a business may have a positive bottom line but a negative bottom line.

  • Discounted asset models assess a business by calculating the current market value of the assets it owns. As this method does not take into account any synergy, it is only useful for evaluating raw material companies such as mining companies.

Relative valuation and comparable transactions

Relative valuation models determine value based on observing market prices for similar assets. For example, one way to determine the value of a property is to compare it with similar properties in the same area. Likewise, investors use the multiples of comparable prices at which listed companies trade to get an idea of ​​relative market valuations. Stocks are often valued on the basis of comparable valuation parameters such as the price / profit ratio (P / E ratio), the price / book value ratio or the price / cash flow ratio.

This method is also used to value illiquid assets such as private companies without market prices. Venture capitalists refer to the valuation of a company’s actions before it becomes public as a pre-monetary valuation. By examining the amounts paid for similar companies in past transactions, investors get an indication of the potential value of an unlisted company. This is called the analysis of previous transactions.

Real asset valuation example

Let’s study the net asset value for Alphabet Inc. (GOOG), the parent company of the search engine and advertising giant Google.

All figures relate to the period ending December 31, 2020.

  • Total assets: $ 232.8 billion
  • Total intangible assets: $ 2.2 billion
  • Total responsibilities: $ 55.2 billion

Total net asset value: $ 175.4 billion (total assets $ 232.8 billion – total intangible assets $ 2.2 billion – total liabilities $ 55.2 billion)

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