What Is Asset Valuation?

Asset valuation is the process of determining the fair market or present value of assets, using 澳洲幸运5官方开奖结果体彩网:book values, absolute valuation models like discounted cash flow analysis, option pricing models or comparables. Such assets include investments in marketable securities such as stocks, bonds and options; 澳洲幸运5官方开奖结果体彩网:tangible assets like buildings and equipment; or 澳洲幸运5官方开奖结果体彩网:intangible assets such as brands, patents and trademarks.

Understanding Asset Valuation

Asset 澳洲幸运5官方开奖结果体🥃彩网:valuation plays a key role in finance and often consists of both subjective and objective measurements. The value of a company's fixed assets—also known as 澳洲幸运5官方开奖结果体彩网:capital assets or 澳洲幸运5官方开奖结果体彩网:property plant and equipment—is straightforward to value based on their book values and replacement costs. 澳洲幸运5官方开奖结果体彩网:Corporations use asset valuation when they apply for loans, and banks ꦏreview it during their credit analysis.

However, there's no number on the financial statements that tell investors exactly how much a company's brand and intellectual property are worth. Companies can overvalue goodwill in an 澳洲幸运5官方开奖结果体彩网:acquisition as the valuation♓ of intangible assets is subjective 🌼and can be difficult to measure.

Net Asset Value

The net asset value – also known as 澳洲幸运5官方开奖结果体彩网:net tangible assets – is the book value of tangible assets on the balance sheet (their historical cost minus the 澳洲幸运5官方开奖结果体彩网:accumulated depreciation) less intangible assets and liabilities – or the money that would be left over if the company was liquidated. This is the minimum a company is worth and can provide a useful floor for a company's asset value because it excludes intangible assets. A stock would be considered undervalued if its market value were below 澳洲幸运5官方开奖结果体彩网:book value🌜, which means the stock is trading at a deep discount to book value per s🥀hare.

However, the market value for an asset is likely to differ significantly from book value – or 澳洲幸运5官方开奖结果体彩网:shareholders’ equity – which is based on historical cost. And some companies’ greatest value is in their intangible a♊ssets, like the findings of a biomed🎃ical research company.

Absolute Valuation Methods

Absolute value models value assets based only on the characteristics of that asset. These models are known as discounted cash flow (DCF) models, and value assets like stocks, bond♔s and real estate, based o🔴n their future cash flows and the opportunity cost of capital. They include:

• 澳洲幸运5官方开奖结果体彩网:Discounted dividend models, which value a stock's price by discounting predicted dividends to the present value. If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued.
• 澳洲幸运5官方开奖结果体彩网:Discounted free cash flow models calculate the present value of future free cash flow projections, discounted by the weighted average cost of capital.
• 澳洲幸运5官方开奖结果体彩网:Residual income valuation models consider all the cash flows that accrue to the firm post the payment to suppliers and other outside parties. The value of the company is the sum of book value and the present value of expected future residual income. Residual income is calculated as 澳洲幸运5官方开奖结果体彩网:net income less a charge for the cost of capital. The charge is known as the equity charge and is calculated as the value of equity capital multiplied by the cost of equity or the required rate of return on equity. Given the opportunity cost of equity, a company can have positive net income but negative residual income.
• Discounted asset models value a company by calculating the present market value of the assets it owns. As this method does not take into account any synergies, it's only useful for valuing 澳洲幸运5官方开奖结果体彩网:commodity businesses like mining companies.

Relative Valuation and Comparable Transactions

Relative valuation models determine the value based on the observation of market prices of similar assets. For example, one way of determining the value of a property is to compare it with similar properties in the same area. Likewise, investors use the 澳洲幸运5官方开奖结果体彩网:price multiples comparable public companies trade at to get an idea of relative market valuations. Stocks are often valued based on comparable valuation metrics such as the 澳洲幸运5官方开奖结果体彩网:price-to-earnings ratio (P/E ratio), 澳洲幸运5官方开奖结果体彩网:price-to-book ratio or the 澳洲幸运5官方开奖结果体彩网:price-to-cash flow ratio.

This method is also used to value illiquid assets like private companies with no market price. Venture capitalists refer to valuing a company's stock before it goes public as 澳洲幸运5官方开奖结果体彩网:pre-money valuation. By looking at the amounts paid for similar companies in past transactions, investors get an indication of an unlisted company's potential value. This is called 澳洲幸运5官方开奖结果体彩网:precedent transaction analysis.

Example of Asset Valuation

Let’s work out net asset value for Alphabet Inc. (GOOG), the parent company of search engine and advertising giant Goo🦄gle.

All figures are for the period ending Dec. 31, 2023.

• Total assets: $402.4 billion
• Goodwill and other intangible assets: $29 billion
• Total liabilities: $119 billion

Total net asset value: $254.5 billion (total assets $402.5 billion – total intangible assets $29 billion – total liabilities $119 billion). This is equal to the company's listed net tangible asset value.

The Bottom Line

Asset valuation is essential to placing an objective price tag on a company's assets. Asset valuation will typically be performed when a company goes through a merger, issues bonds, or goes public.