Analyzing The Balance Sheet Method Essay
The balance sheet method is probably the easiest way to valuate a company. It is an estimate of the company’s assets. The plainest way of putting it is:
Assets - Liabilities = Company Value The information required are the values found in the balance sheet, although they may need to be adjusted depending on the valuation method. One of the main advantages of this method is, that it is very simple and uses information that is published anyway (statement of financial position). There are many disadvantages to this technique: it is static, so neither considers the time-value of money nor the industry’s current situation. Contracts or internal problems aren’t considered either. Another issue is that creative accounting can distort the figures, i.e. changing the value.
The multiples method is regarded a simple valuation tool, frequently used by investment banks and equity analysts for calculating a rough estimate of the company 's value.
Basically, one assumes that certain income and operational measures are relevant for the pricing of the equity listed on the stock exchange. The most common multipliers are P / E (price-earnings ratio), EV / EBITDA (Enterprise Value / Earnings before interest, taxes, depreciation and amortisation) and EV / EBIT (enterprise value / earnings before interest and taxes).
The concept of the multiplier method is based on the Law of One Price, according to which two homogenous goods can not have a non-identical price.…