Capitalization is one of two well-known approaches that can be used to estimate the ownership of a company. Capitalization can be calculated only if the company is sufficiently stable and its activity is predictable with a reasonable degree of probability. This approach allows you to determine the intrinsic value (cleared of debt) of the capital of the shareholders of the enterprise. To do this, the amount of cash flow (net profit) must be divided by the capitalization ratio.
It is necessary
Financial report
Instructions
Step 1
Prepare a financial statement of the company's activities for a specific period of time (usually a minimum period of 5 years).
Step 2
Adjust the data to comply with GAAP (Generally Accepted Accounting Principles) or to normalize reporting. If it becomes necessary to eliminate the impact on this data of inactive or surplus assets, the value of the latter should be considered in step 9. Determine whether the normalized income measure needs to be adjusted for the income shortfall. In step 9, alternatively, the identified missing assets can be considered separately.
Step 3
To get the adjusted net income figure, calculate the taxes on the normalized income found in step 2.
Step 4
If the capitalized income stream is cash, you will need to further adjust the metric obtained in step three to arrive at a net cash (gross) income stream.
Step 5
Calculate the capitalization ratio. The simplest formula for an enterprise is to divide the amount of borrowed funds by the amount of equity capital.
Step 6
Determine the base for capitalization - most often this is the last 12 months or the last financial year.
Step 7
Calculate the operating value of the enterprise value by dividing net income or net (gross) cash flow by the capitalization ratio.
Step 8
Perform a common sense test to determine the plausibility of the value obtained.
Step 9
If in step 2 you adjusted the financial statements (in order to determine the impact on the valuation of the enterprise of surplus or inactive assets), you need to determine the value of these assets and add it to the value calculated in step 7. If the shortage of assets was taken into account during the normalization adjustment of the financial statements, then nothing it is not necessary to undertake, otherwise - consider the possibility of reducing the value of the company by the cost of missing assets.
Step 10
Adjust the value obtained in step 9 for the non-controlling interest discount, liquidity discount, or control premium.
