Valuation of a company

[S]

Does anyone have any tips as to how to value a company using its balance sheet, my thoughts are subtracting the liabilities from the assets. Though I'm aware shares are also included in the balance sheet (correct me if i'm wrong pls) - how would i take those into account?

Just generally as well - any guidance as to how to talk about about a balance sheet in interviews?

Thank you!!

 

[J Wu]

In terms of valuing a company, the most common methods I see are discounted cash flow analysis, precedent transactions analysis or comparable companies analysis.

I’ve never really heard of using a balance sheet to value a company. I’m curious, have you heard of someone being asked this before?

I would subtract the liabilities and stockholders equity (or just look at the sum of assets because balancing a balance sheet requires the liabilities and equity to equal the assets anyway). This would be essentially saying a company is worth the value of its assets.

 

[Salma]

Does anyone have any tips as to how to value a company using its balance sheet, my thoughts are subtracting the liabilities from the assets. Though I'm aware shares are also included in the balance sheet (correct me if i'm wrong pls) - how would i take those into account?

Just generally as well - any guidance as to how to talk about about a balance sheet in interviews?

Thank you!!

In terms of balance sheet issues for case study interviews, I follow this structure:

1. What the problem is? (i.e. liabilities exceed assets or no up to date balance sheet with exact figures)
2. Why is it a problem? (i.e buyer does not want to acquire a target company with financial problems)
3. What solutions can you offer? (i.e. indemnity? or any other contractual protection)

This is obviously very brief, in the interview you should be more specific and relate it to the facts but I hope this helps.

 

[Abstruser]

Does anyone have any tips as to how to value a company using its balance sheet, my thoughts are subtracting the liabilities from the assets. Though I'm aware shares are also included in the balance sheet (correct me if i'm wrong pls) - how would i take those into account?

Just generally as well - any guidance as to how to talk about about a balance sheet in interviews?

Thank you!!

As @John Wu mentioned, DCF is the most common method of valuation. Giving judgement based on book value is done (if at all) as part of the comparable companies analysis.

I wouldn't worry too much about coming up with a set method of determining valuation based on a balance sheet. As @Salma mentioned, its more about being familiar with the terms of the balance sheet itself. I would recommend familiarising yourself with a few simple balance sheet ratios - Debt/Equity, or Assets/Liabilities. That will help you to give quick judgement on the financial health (and therefore viability) of a company/acquisition target.

I've only ever been asked to give an exact valuation figure in my A&O case study. I was given a balance sheet, but there was also correspondence from a fictitious financial advisor who gave me a formula of sorts to calculate an ideal purchase price/valuation of a potential acquisition target. If I remember correctly, it was 15 times the company's present post-tax income. I was told tax was typically 20%. So I just had to go over to the balance sheet, find the latest EBITDA, deduct 20% and multiply by 15. It was simple maths - I did it on my phone calculator - but I would have been lost if I didn't know what EBITDA was, or where to find it on a balance sheet. So again, I think it is more helpful if you have broad familiarity with the balance sheet, as it is unlikely you will be asked to give independent judgement on a company's valuation.

Hope this helps.

 

[S]

Thanks guys very much!! v helpful!!