While Tesla's market capitalization is higher than both Ford and GM, Tesla is also financed more from equity. Lastly, GM had a market capitalization of $51 billion, balance sheet liabilities of $177.8 billion, and a cash balance of $13 billion, leaving an enterprise value of approximately $215.8 billion. The company also had around $3.5 billion in cash in its accounts, giving Tesla an enterprise value of approximately $64.5 billion.įord had a market capitalization of $44.8 billion, outstanding liabilities of $208.7 billion, and a cash balance of $15.9 billion, leaving an enterprise value of approximately $237.6 billion. On top of that, its balance sheet showed liabilities of $17.5 billion. In 2016, Tesla had a market capitalization of $50.5 billion. To illustrate this, let’s take a look at three well-known car manufacturers: Tesla, Ford, and General Motors (GM). The enterprise value is calculated by combining a company's debt and equity and then subtracting the amount of cash not used to fund business operations. Let's take a look at enterprise values-a more accurate measure of company value that takes these differing capital structures into account. Equity represents shareholders who own stock in the company and hold a claim to future profits. In this case, debt represents investments by banks or bond investors in the future of the company these liabilities are paid back with interest over time. One of the shortcomings of market capitalization is that it only accounts for the value of equity, while most companies are financed by a combination of debt and equity. Market Capitalization = Share Price x Total Number of Shares It’s calculated by multiplying the total number of shares by the current share price. Market capitalization is one of the simplest measures of a publicly traded company's value. However, the challenge of this type of valuation is that its accuracy relies on the terminal value, which can vary depending on the assumptions you make about future growth and discount rates. The benefit of discounted cash flow analysis is that it reflects a company’s ability to generate liquid assets. Terminal Cash Flow / (1 + Cost of Capital) # of Years in the Future Discounted cash flow analysis calculates the present value of future cash flows based on the discount rate and time period of analysis. This technique is highlighted in the Leading with Finance as the gold standard of valuation.ĭiscounted cash flow analysis is the process of estimating the value of a company or investment based on the money, or cash flows, it’s expected to generate in the future. Discounted Cash FlowsĪnother method of valuing a company is with discounted cash flows. Relying on basic accounting metrics doesn't paint an accurate picture of a business’s true value. The figure you’re left with represents the value of any tangible assets the company owns.Īs Harvard Business School Professor Mihir Desai mentions in the online course Leading with Finance, balance sheet figures can’t be equated with value due to historical cost accounting and the principle of conservatism. To calculate book value, start by subtracting the company’s liabilities from its assets to determine owners’ equity. Due to the simplicity of this method, however, it’s notably unreliable. One of the most straightforward methods of valuing a company is to calculate its book value using information from its balance sheet. Here’s a look at six business valuation methods that provide insight into a company’s financial standing, including book value, discounted cash flow analysis, market capitalization, enterprise value, earnings, and the present value of a growing perpetuity formula. However, this simple method doesn’t always provide the full picture of a company’s value. One way to calculate a business’s valuation is to subtract liabilities from assets. The valuation process takes place for a variety of reasons, such as determining sale value and tax reporting.įree E-Book: A Manager's Guide to Finance & AccountingĪccess your free e-book today. During this process, all aspects of a business are evaluated to determine the current worth of an organization or department. What Is Company Valuation?Ĭompany valuation, also known as business valuation, is the process of assessing the total economic value of a business and its assets. So, how do finance professionals evaluate assets to identify one number?īelow is an exploration of some common financial terms and methods used to value businesses, and why some companies might be valued highly, despite being relatively small. There are many factors to consider, but it's an important financial skill businesses leaders need to succeed. Determining the fair market value of a company can be a complex task.
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