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What Is Involved in a Corporate Valuation?

Jim B.
Jim B.

A corporate valuation is an assessment, performed by either potential investors or corporation leadership, of the financial strength of a corporation. Investors use these valuations to decide if a corporation is worthy of their capital, while internal valuations are made to see if there are areas that need improvement or some potential financial problem areas that need immediate correcting. The technical method of corporate valuation involves using financial reports and balance sheets to make ratios for comparison to other similar corporations. There are other methods of valuation that can focus on a corporation's less tangible assets such as leadership or marketing strategies.

Comparing one corporation to another can be a daunting task, especially when the corporations involved operate on the most elite financial levels. At such levels, it can be difficult to differentiate corporations when the financial numbers they produce are significantly large. Yet there are differences to be sure, and a corporate valuation which effectively shines a spotlight on these differences can be invaluable to both investors and corporate leadership alike.

Businessman with a briefcase
Businessman with a briefcase

The essence of any good corporate valuation is the determination of how many assets a corporation might have compared to the liabilities that detract from their performance. Although the techniques used to make a valuation can be intricate, the ultimate evaluation still essentially subtracts all of the liabilities from the assets and sees if there is anything worthy left over. These assets and liabilities may be the kind that can be measured exactly, such as income or debt, or they can be more subjective and, therefore, more of a judgment call for the evaluator.

In terms of tangible corporate valuation, the easiest way to assess a company's financial strength is to study its balance sheets and income reports. From these documents, numerous financial ratios can be calculated as a way to study different aspects of a corporation's operations. These ratios can measure efficiency, reliance on debt, cash flow, and many other pertinent factors which have a distinct bearing on financial strength. By comparing these ratios to other companies within a similar industry, the worth of the company being studied becomes much clearer.

On the other hand, the financial numbers may not tell the entire story about a company's value. For example, imagine that there is a company with sparkling financial numbers, but the retirement of the company's CEO has left them with a leadership void. If the CEO was the one behind the decisions that led the company to prosperity, a financial evaluation might not tell the complete story of the company's future prospects. Such an example illustrates why it might be wise for evaluators to conduct a corporate valuation with a close eye on crucial intangible qualities.

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