How do you value assets?

You can use comparables, option pricing models, discounted cash flow analysis, book values, or absolute valuation methods to determine how much an asset is worth on the market. These assets can be investments in marketable securities like stocks, bonds, and options; physical assets like buildings and equipment; intangible assets like brands, patents, and trademarks; or tangible assets like buildings and equipment.

Knowledge of Asset Valuation

Finance’s fundamental practice of asset appraisal frequently combines subjective and objective measurements. Based on their book values and replacement costs, a company’s fixed assets, sometimes referred to as capital assets, property, plant, and equipment, may be easily valued. Investors cannot, however, determine from the financial accounts the exact value of a company’s brand and intellectual property. Due to the subjectivity and potential difficulty of measuring intangible assets, companies may overvalue goodwill in an acquisition.

Value of Net Assets

The amount of money left over if the company goes out of business is called the net asset value, also written as net tangible assets. It is calculated by subtracting the amount of money the company owes and the amount that its tangible assets are worth today minus the amount that they have lost over time. Because it excludes intangible assets, this is the absolute least that a firm may be valued at and can serve as a helpful floor for its asset value. A stock would be deemed undervalued if its market value was lower than its book value, indicating that the share price is significantly below the book value.

However, because book value, also known as shareholders’ equity, is based on past costs, the market value of an asset is likely to be very different from this value. And for other businesses, such as those in the biomedical research industry, their most valuable assets are their intangible ones.

Methods of Absolute Valuation

Assets are valued using their qualities in absolute value models. These models, sometimes called discounted cash flow (DCF) models, evaluate assets, including stocks, bonds, and real estate, using their expected future cash flows and the opportunity cost of capital. They consist of:

• Models that discount expected dividends by their current value determine the stock price. The stock is undervalued if the value derived from the DDM exceeds the price at which shares are trading.
  Calculated using the weighted average cost of capital, discounted free cash flow models determine the present value of future free cash flow estimates.
• Models for valuing residual income consider all of the cash flows the company receives after paying its suppliers and other external parties. The sum of the book value and the present value of the anticipated future residual income represents the company’s worth. Net income less a charge for the cost of capital equals residual income. The fee, often called the “equity charge,” is derived by multiplying the equity capital’s value by the cost of equity, also known as the needed rate of return on equity. A corporation may have a positive net income but a negative residual income due to the opportunity cost of equity.
• A company’s worth is determined by determining the current market value of its assets. This strategy is only helpful for assessing commodity firms like mining corporations since it ignores synergies.

Comparable transactions and relative valuation

Based on market values for comparable assets, relative valuation methods estimate value. For instance, comparing a home with others in the same neighborhood that are comparable might help determine its worth. Similarly, investors determine relative market values by looking at the price multiples that similar public firms trade at. Comparable valuation criteria, such as the price-to-earnings ratio (P/E ratio), price-to-book ratio, or price-to-cash flow ratio, are frequently used to determine the worth of stocks.

Illiquid assets, such as privately held enterprises without a market price, are also valued using this technique. Pre-money valuation is the term venture capitalists use to describe valuing a company’s shares before it goes public. Investors can determine the future worth of an unlisted firm by comparing the prices paid for comparable companies in prior deals. Precedent transaction analysis is the term used for this.

Example of Asset Valuation in the Real World

Let’s calculate Alphabet Inc.’s (GOOG) net asset value, the parent firm of advertising and search engine juggernaut Google.

All numbers pertain to the time frame ending December 31, 2018.

• Assets totaling $232.8 billion
• $2.2 billion in total intangible assets.
• Liabilities totaling $55.2 billion
• Total assets: $232.8 billion; total intangible assets: $2.2 billion; total liabilities: $55.2 billion; total net asset value: $175.4 billion.

Conclusion

• The process of figuring out an asset’s fair market worth is known as asset valuation.
• Measurements that are both subjective and objective are frequently used in asset valuation.
• The book value of tangible assets is less than the value of liabilities, and intangible assets are the net asset value.
• Absolute value models, such as discounted dividends, discounted free cash flow, residential income, and discounted asset models, evaluate assets solely based on those assets’ features.
• Investors can assess the value of an asset by comparing it to similar assets using relative valuation measures like the P/E ratio.