Evaluating a non-profitable company requires close analysis of various financial metrics to identify potential opportunities or threats and make informed decisions.
Conventional valuation methods based on profit or cash flow metrics are not sufficient here or, such as the multiple method, are completely unsuitable. Some approaches and methods that can be considered when valuing a loss-making company:
- Book Value Method: This method determines the book value of the company by calculating equity (total value of assets minus liabilities). This approach can be useful if the company has assets greater than its liabilities.
- Liquidation Value: This method takes into account how much the company could be worth if it were liquidated. It compares the value of assets minus liabilities. This is a pessimistic view and should rather be viewed as a lower bound.
- DCF Method (Discounted Cash Flow): The DCF method involves estimating the company’s future cash flows, taking into account an appropriate discount rate to calculate the present value of these cash flows. This approach requires detailed financial forecasts and is sensitive to assumptions.
- Comparable company analysis: This method involves analyzing similar companies in the same industry to derive company value. This can be difficult if the company being valued is not profitable, but adjustments can be made to take this into account.
- Risk premiums: Since a non-profitable company has higher risks, it may make sense to add a risk premium or adjust the discount rate accordingly to account for the uncertainties.
- Industry-Specific Factors: In some industries, there may be specific valuation factors that should be considered. For example, technology companies may be valued differently than traditional manufacturing companies based on their growth potential.
- Expert valuation: Hiring an independent valuation expert can be useful in order to make an objective estimate of the company’s value.
The choice of method depends on the individual situation of the company, its industry and the information available.
