- November 27, 2020
- Posted by: avaltos
- Category: Articles
To understand how to increase a company’s value, knowing how the value is created is a key factor.
There are three commonly-used ways to analyze a company’s value.
1. For a publicly-traded company, market capitalization (market cap) is the value. The market cap is how much all the outstanding stock is worth at the current share price.
2. For a private company, the value can be estimated by using some multiplier, which is industry specific, times the earnings before interest, depreciation, and amortization (EBITDA). This gives an estimate of what most investors would think the company is worth.
3. Another way to value any company (public or private) is by calculating the economic profit. Economic profit is the profit less the cost of the capital used to create it. For comparative purposes, calculate the economic value-added (EVA), which is the net profit after taxes, minus the opportunity cost of the capital invested in the company.
Research conducted by Stern Stewart on companies that focus on creating EVA growth discovered that they usually outperform the market and competitors consistently, in terms of valuation. When the EVA of a company increases over time, the value also increases. Click here to read the complete article or Click here to Download a PDF Copy.