Asset-Based Valuation

Asset-Based Valuation uses market values of a company's assets and liabilities to determine the value of the company as a whole.

Asset based valuation works well for:

• Companies that do not have a significant number of intangible or "off-the-book" assets, and have a higher proportion of current assets and liabilities.
• Private companies, especially if applied together with multiplier models.
• Financial companies, natural resource companies and companies that are been liquidated.

Asset-based valuation may not be appropriate when:

• Market values of assets and liabilities cannot be easily determined.
• The company has a significant amount of intangible assets.
• Asset values are difficult to determine (e.g., in periods of very high inflation).
• Market values of assets and liabilities significantly differ from their carrying values.

Finance for Managers: Asset-Based Valuations - Liquidation Value

Liquidation value is similar to adjusted book value.  It attempts to restate balance-sheet values in terms of the net cash that would be realized if assets were disposed off in a quick sale and all liabilities of the company were paid off or otherwise settled.  This approach recognizes that many assets, especially inventory and fixed assets, usually do not fetch as much as they would if the sale were made more deliberately.  

Asset valuation approach in liquidation

Liquidation

Liquidation value is the net realizable amount that could be generated by selling a company’s assets and discharging all its liabilities.

When valuing a business for liquidation, most assets are marked down and the liabilities treated at face value.

• Cash and securities are taken at face value.
• Receivables require a small discount (perhaps 15 percent to 25 percent off).
• Inventory a larger discount (perhaps 50 percent to 75 percent off).
• Fixed assets at least as much as inventory.
• Any goodwill should probably be ignored.
• Most intangible assets and prepaid expenses should be ignored.

The residual is the shareholders’ take.

This valuation method is useful for companies being dissolved.

It doesn’t consider value arising from deploying the resources in combination. It is thus of limited use for valuing businesses as going concerns.


Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary

Liquidating Value of Assets

Liquidating Value of Assets

Percentage of Liquidating Value to Book Value
(Normal Range & Rough Average)

Type of Asset

Current assets: cash assets (including securities at market)
Normal Range: 100%
Rough Average: 100%

Current assets: receivables (less usual reserves)*
Normal Range: 75%-90%
Rough Average: 80%

Current assets: inventories (at lower of cost or market)
Normal Range: 50%-75%
Rough Average: 66% (2/3)

Fixed and miscellaneous assets: real estate, buildings, machinery, equipment, nonmarketable investments, intangibles
Normal Range: 1%-50%
Rough Average: 15% (approx.)


*Retail instalment accounts must be valued for liquidation at a lower rate. The range is about 30%-60%; the average, about 50%

Source: Security Analysis (New York: McGraw Hill, 1940), p.579

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Liquidating Value

When looking at the current asset value, we’re getting down to a notion that few investors care to ponder – the liquidating value.

Following the Great Depression the share price of public companies fell so low that many investors bought in just to sell off the companies’ assets and close their operations.

Liquidating a company is not a pleasant prospect, since workers lose their jobs, communities lose their income base, and society in general suffers.

The liquidating value is not only the end of the line; it can be seen as the absolute bottom line. There is no question that the ultimate intrinsic value is revealed when liquidation occurs.

The net current asset value (working capital) per share described by Graham also is a rough index of liquidating value. The liquidating value of a company is never a hard number. It can only be estimated, until a company actually is sold off. This is attributed to a fact we sometimes called Graham and Dodd’s first rule of liquidating value: “The liabilities are real but the value of the assets must be questioned.”

Fortunately, advise Graham and Dodd, it is enough to get a rough idea of the liquidating value for most purposes, accepting the fact that you won’t get, nor will you actually need, an exact figure.

A share price below liquidating value seldom is good news. Temporary conditions – a big stock market drop, a sudden reaction to shocking bad news – may impact a company to that extent. Very quickly, however, the share price should recover. When a stock persistently sells below its liquidating value, it indicates an error in judgment by someone – management, shareholders, or the stock market in general.