The Art of Company Valuation and Financial Statement Analysis: A Value Investor's Guide with Real-life Case Studies

Chapter 8

Company Valuation

Managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.

Warren E. Buffett

 

Company valuation is concerned with deriving the fair value of a company. There are various methods and approaches in order to determine the fair value, which usually lead to different results and assessment ranges. The true value of a business is therefore not objectively fixed, but is always a compromise of differing assessment approaches, which point to a specific fair company value range. A ticket to an already sold-out rock concert, for example, has a much higher value to the fan than to a unconcerned classical music enthusiast. An ounce of gold does not generate an ongoing yield, but it provides subjective security for the investor – and that comes at a price. The value of many assets is not necessarily determined by their book value or the expected cash flows, but rather by intangible and sometimes irrational and sentimental characteristics. In contrast to that are risk-free government bonds, which provide holders with a given yield, determinable down to the last cent.

The value of companies can also be determined in different ways and is not given as one and the same figure for every investor. An aggressive private equity investor with an intention to liquidate the firm, for example, regards the book value, or more precisely the liquidation value, of a business as the true value. In contrast, a family ...