Note that this method only works for publicly traded companies, where share values can be easily determined. A disadvantage of this method is that it subjects the company’s value to the fluctuations of the market. If the stock market declines due to an external factor, the company’s market capitalization will fall even if its financial health has not changed. Market capitalization, because it relies on investor confidence, is a potentially volatile and unreliable measure of a company’s true value. Many factors go into to determining the price of a share of stock, and thus a company’s market capitalization, so it’s best to take this figure with a grain of salt. That said, any potential buyer for a company might have similar expectations to the market and place similar value on the company’s potential earnings.
By law, all publicly-held companies’ balance sheets are available online for free. [5] X Research source A simple search engine search will turn up any public company’s balance sheet.
For example, consider Sanders Enterprises, a fictional, publicly-traded telecommunications company with 100,000 shares outstanding. If each share is currently trading at $13, the company’s market capitalization is 100,000 * $13, or $1,300,000.
Market capitalization may be deemed unrealistic if a company’s value is mostly held in intangible assets and investor overconfidence or speculation drives the price up way beyond reasonable limits. This method has several shortcomings. First, it may be difficult to find enough data, as sales of comparable businesses may be very infrequent. Also, this valuation method does not account for significant differences between business sales, such as whether the company was sold under duress. However, if you are trying to find the market value of a private company, your options are limited, and comparison is a simple way to get a rough estimate.
If you are determining the market value of a private company, you can use publicly-traded companies of the same industry and size for comparison. This is easier because you can find their market value by using the market capitalization method in a few minutes by searching online.
For example, imagine that 3 recent mid-sized telecommunications companies sold for $900,000, $1,100,000, and $750,000. Averaging these 3 sale prices together yields $916,000. This might seem to indicate that Anderson Enterprises’ market capitalization of $1,300,000 is an overly optimistic estimate of its value. You may wish to weigh the different values based on their closeness to the target company. For example, if one is of very similar size and structure to the company being estimated, you may choose to assign a higher weight to this company’s sale value when calculating the average sale price. For more information, see how to calculate weighted average.
Sales or revenues, along with commissions and inventory expenses if there are any, are reported on a company’s income statement.
The source of the coefficient will also specify the appropriate financial figures to use in your calculation. For example, total annual earnings (net income) is the common starting point.
For example, imagine that the appropriate multiplier for mid-sized accounting firms is estimated at 1. 5 * annual revenues. If Anderson Enterprises’ total revenues this year are $1,400,000, then the multiplier method yields a business value of (1. 5 * 1,400,000) or $2,100,000.
