Asset-Based Approach: Calculations and Adjustments

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Updated October 28, 2020

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What Is an Asset-Based Approach?

An asset-based approach is a type of business valuation that focuses on a company's net asset value. The net asset value is identified by subtracting total 澳洲幸运5官方开奖结果体彩网:liabilities from total assets. There is some room for interpretation in 🌠terms of deciding which of the company♛'s assets and liabilities to include in the valuation and how to measure the worth of each.

Key Takeaways

There are several methods available for calculating the value of a company.
An asset-based approach identifies a company’s net assets by subtracting liabilities from assets.
The asset-based valuation is often adjusted to calculate a company's net asset value based on the market value of its assets and liabilities.

Understanding an Asset-Based Approach

Identifying and maintaining awareness of 澳洲幸运5官方开奖结果体彩网:the value of a company is an important responsibility for financial executives. Overall, s♊takeholder and investor returns increase when a company’s value increases, and vice versa.

There are a few different ways to identify a company’s value. Two of the most common are the equity value and 澳洲幸运5官方开奖结果体彩网:enterprise value. The asset-based approach can also be used in conjunction with these two methods or as a standalone valuation. Both 澳洲幸运5官方开奖结果体彩网:equity value and enterprise value require the use of equity in the calculation. If a company does not have equ🎐ityꦜ, analysts may use the asset-based valuation as an alternative.

Many stakeholders will also calculate the asset-based value and use it comprehensively in valuation comparisons. The asset-based value may also be required for private companies in certain types of analysis as added due diligence. Furthermore, the asset-based value can also be an important consideration when a company is planning a sale or 澳洲幸运5官方开奖结果体彩网:liquidation.

Important

The asset-based approach uses the value of assets to calculate a business entity's valuation.

Calculating Asset-Based Value

In its most basic form, the asset-based value is equivalent to the company’s book value or shareholders’ equity. The calculation is generated by subtracting liab♓ilities from assets.

Often, the value of assets minus liabilities differs from the value reported on the 澳洲幸运5官方开奖结果体彩网:balance sheet, for example, asset-based valuations can provide latitude for using market values rather than balance sheet values. Analysts may also include certain 澳洲幸运5官方开奖结果体彩网:intangible assets in asset-based valuations that may or ma𒊎y not be on the balance sheet.

Adjusting Net Assets

One of the biggest challenges in arriving at an asset-based valuation is adjusting 澳洲幸运5官方开奖结果体彩网:net assets. An adjusted asset-based valuation seeks to identify the 澳洲幸运5官方开奖结果体彩网:market value of assets in the current environment. Balance sheet valuations use depreciation to decrease the value of assets over time. Thus, the book value of an asset is not necessarily equivalent to the 澳洲幸运5官方开奖结果体彩网:fair market value.

Other considerations for net asset adjustments may include certain 澳洲幸运5官方开奖结果体彩网:intangibles that are not fully valued on the balance sheet or included on the balance sheet at all. Companies are often not allowed to include the value of their brand on their balanc🐠e sheet because of difficulties calculating a reliable cost or value of the brand name. However, since an adjusted asset-based approach looks at what a company could potentially sell for in the current market, these intangibles are important to consider.

In an 澳洲幸运5官方开奖结果体彩网:adjusted net asset calculation, adjustments can also be mad💮e for liabilities. Market value adjustments can potentially increase or decrease the value of liabiliti⛎es, which directly affects the calculation of adjusted net assets.