Dear Sifu of LYN,

Greetings!

I have a question about the value of a share in private company.

How do we evaluate a company's share value?

What are the factors do we based it on? Is there like a guideline or someone we can hire to assist in the evaluation?

Thanks,
Joel

This post has been edited by SpIcYjOe: Feb 15 2016, 03:51 PM

5 times PE was what i used. but PE alone is not the sole indicator, you should also factor in assets, liabilities, potential growth, future prospects, industry competition, profitability, etc etc...

Hard to say, you can value it according to your preference..
Some people use book value + goodwill.
Some use Market approach where they compare other companies within the same industry to value the company. But this method requires more market research on the industry itself...
Another common method is to discount future Cash flow of company..
It comes down on what industry the company is in and what method the seller and buyer uses.

Thanks for your comment.

Basically, to value a company's share, it is quite subjective then?

It is not subjective, it depends on what buyer intend to have that determine the potential value of the company.

1. If the company business is profitable, then the value of company come from ability to generate profit and cashflow for the future.
2. If the company business is no profitable, then value could come from asset the company owned. Asset can be ranged from hard asset owned like land, properties, to concession license, networking etc.

hire an auditor to do due diligence first, from there you either go for consultant or use your own ratio such as payback period, P/E ration, net cash per share and how many times of net assets. then compare those ratios to average industry ratios on bursa. from there you will have at least some idea how much premium you are paying, and determine are these premium worth it? just like other forumer said, it might be their assets such as land building, location or its intelligible asset such as pattern, licence or know how etc.

This post has been edited by klthor: Feb 15 2016, 04:51 PM

as he said..
just to add, a lot of tech companies do get valued using future sales/earnings and cash flow..
Hence Uber is valued at few billions even tho its not making anywhere near it yet...

tech companies are different from bricks and mortar business.

only TS knows what kind of business and hence picking the right valuation method....

It will be the same eventually.

Tech company generally is being valued differently as their potential profit come from future instead of now.
Their future profit may exponential rise in the future, that's where investors place their bet/valuation on them.

No company even tech company can survive with forever no profit/cashflow generated.
If the tech fail to turn the business into profitable model, its value eventually will crash as well.
See how many dotcom company went burst in the dotcom bubble, value from sky high to virtually nothing in just matter in few years time.

you got a point too. but how you value FB/twitter are not the same as you value walmart/coca-cola right... still not exactly the comparables...

Yup, you value different due to Walmart or Coca Cola company won't register a 100% profit rise next year in a matured business.

But FB, twitter or tech company can make a loss or little profit today, but making billions in the coming few years time, profit rise 100%, 200% in short period of time, when their business finally turn into profitable model, so that's where the difference in valuation method.

While a sunset industry company may make billion today, but due to poor future visibility, its valuation won't fetch high as well.

So it is all about future profitability that dictate the valuation (set aside another model of asset based valuation first).

Don't forget the elephant in the room. The most famous one of all. AMZN. Now only about $500, down from a high of nearly US$700 at the end of 2015.

Thank you all for your comments.

Sorry, but what does 'PE' stand for? Forgive my noobness.

Price per earning multiple

Thanks for the reply, "price per earning'? Is that the same thing as profit?

Nola, it's the price per earning ratio. It's a ratio.

But the price is referred to as market price right? For public listed company where you can compare the earnings per share (Net Profit / No of share issued) and compare it with the market price to get the PE ratio?

Can this be applicable for private company?

for laylam, PE ration = Price/Earnings. example, i sell you my business for RM16mil and my yearly earning from my business is RM2mil. PE ration = 16mil/2mil = 8 times. however, this figure is merely meaningless without benchmark to your industry PE ration.

non listed companies also got a value 1. it is applicable for private company also.

often, PE for private company would be lower given its liquid status.

as explained by klthor, yes, it is meaningless if it's just PE on its own. add on to your example. let's say if the industry PE is around 10 times.

so it means you are buying at a lower price at 8 times instead of the industry norm.