Business Valuation Glossary with Brief Explanation
Providing business valuation services requires a considerable level of expertise and places a responsibility on valuation professionals to effectively communicate the process and outcomes of the valuation in a transparent and accurate manner. Hence, the use of well-defined terms that are generally recognized in the industry and consistently applied within the profession helps to promote clarity and quality of work.
This glossary serves as a tool for business valuation practitioners, solidifying the comprehensive knowledge required for accurate and meticulous value assessments, and facilitating the effective communication of the methodologies used to determine such values.
An ABCP (Asset-Backed Commercial Paper) conduit is a special-purpose vehicle (SPV) or entity created by a financial institution to issue asset-backed commercial paper. The conduit purchases receivables or other financial assets from various originators (such as corporations or financial institutions) and finances these purchases by issuing ABCP to investors.
Acquired Growth
Acquired growth refers to the increase in a company's revenue, market share, or other key metrics resulting from mergers, acquisitions, or other external business combinations. Unlike organic growth, which is driven by the company's existing operations, acquired growth comes from integrating and consolidating external entities or assets into the company's portfolio.
Acquisition of Subsidiaries
The acquisition of subsidiaries refers to the process by which a parent company purchases a controlling interest in another company, which then becomes a subsidiary of the parent company. This process typically involves buying more than 50% of the target company's voting shares, thereby gaining control over its operations and decision-making.
Acquisition Provision
Acquisition provisions are specific terms and conditions included in a contract or agreement that outline the details of acquiring one company by another.
Adjusted Book Value Method
The Adjusted Book Value Method is a way to determine the value of a company by adjusting its recorded book value to reflect the fair market value of its assets and liabilities. It involves making adjustments to account for factors that affect the value of the company's assets, such as changes in market conditions or the value of intangible assets. This method is used when the recorded book value does not accurately represent the true value of the company's assets.
Adjusted Net Asset Method
The Adjusted Net Asset Method is a way to determine the value of a business by looking at its net assets (total assets minus liabilities), while taking into account adjustments for factors that affect its value. It is often used when a company's assets, like real estate or investments, play a significant role in its overall worth.
Amortized Cost Method
The amortized cost method is an accounting technique used to gradually write down the value of a financial asset or liability over time. This method involves spreading out the cost of an asset or liability over its useful life, considering both the initial cost and any interest or principal repayments.
Appraisal
Appraisal is the process of determining the value of something, such as a property or business. It involves analyzing factors like market conditions and financial performance to estimate its worth. Appraisals are conducted by experts who consider various factors to provide an informed valuation.
Appraisal Approach
The appraisal approach is the method used to determine the value of something. It involves using specific techniques and considering different factors to estimate its worth. Appraisers select an approach that best suits the situation and use it to gather information, analyze data, and arrive at a reliable valuation.
Appraisal Date
The appraisal date is the specific date when an appraisal is done to determine the value of an asset. It takes into account the current conditions and circumstances that may affect its worth.
Appraisal Method
An appraisal method is a structured approach used to determine the value of something, such as a property or business. It involves using specific techniques to estimate its worth. Common methods include comparing it to similar items in the market, considering its income generation potential, assessing the cost to replace it, or evaluating its assets and liabilities. Appraisers choose the method that best suits the situation to determine the value accurately.
Appraisal Procedure
An appraisal procedure is a structured process used to determine the value of a property, asset, or business. It involves collecting information, analyzing it, and using valuation methods to estimate the value. The steps include defining the purpose, gathering data, applying valuation methods, making adjustments, and reporting the findings. Qualified appraisers use this procedure to determine the fair market value of assets.
Arbitrage Pricing Theory
Arbitrage Pricing Theory (APT) is a financial model that helps determine the expected return of an investment based on different factors that affect its risk. It takes into account multiple factors, like interest rates and inflation, instead of just the overall market risk. The theory assumes that investors will adjust prices to ensure fair value. Essentially, APT provides a way to analyze and price investments by considering various factors that can impact their returns.
Asset (Asset-Based) Approach
The asset approach, also called the asset-based approach, is a method used to determine the value of a company by considering its assets and liabilities. It focuses on the value of tangible and intangible assets owned by the company, like buildings, equipment, inventory, and patents. The approach subtracts the company's liabilities from the value of its assets to calculate the net asset value. This method is useful when valuing companies with significant assets or when the company's earnings are unstable. There are two methods within the asset approach: the going concern method, which assumes the company will continue operating, and the liquidation method, which assumes the company will be sold off. The asset approach provides a conservative estimate of a company's value but may not fully capture the value of intangible assets.
Asset Deal
An asset deal is a type of business transaction where a buyer purchases specific assets of a company rather than buying the company's stock or equity.
Asset Purchase Agreement (APA)
An Asset Purchase Agreement (APA) is a legal contract between a buyer and a seller outlining the terms and conditions under which specific assets of a company will be purchased.
Asset-backed Commercial Paper (ABCP)
Asset-Backed Commercial Paper (ABCP) is a short-term investment vehicle with a maturity typically between 90 and 270 days, backed by physical assets or other financial assets. These assets can include receivables, loans, or other cash-flow-generating assets.
Available-for-Sale (AFS) Securities
Available-for-Sale (AFS) securities are financial assets that a company does not intend to hold until maturity nor trade in the short term.
Balance Sheet Reformulation
Balance sheet reformulation is the process of reorganizing and adjusting a company's balance sheet to provide a clearer and more analytical presentation of its financial position.
Beta
Beta is a measure used in finance to understand how much a particular investment moves compared to the overall market. It helps investors assess the risk and volatility of an asset. A beta of 1 means the investment moves in line with the market. A beta higher than 1 means it tends to be more volatile, while a beta lower than 1 means it's less volatile. A negative beta means the investment moves in the opposite direction of the market. Beta is used to manage risk and make decisions about diversifying investments.
Blockage Discount
Blockage discount is a reduction in the value of a large number of shares or a significant ownership stake in a company when selling them all at once could disrupt the market. It accounts for the difficulty of finding buyers for such a big block of shares without causing a negative impact on the share price. The discount is applied to the value of the shares to reflect this potential market impact and provide a fair valuation. Blockage discounts are used when a large shareholder wants to sell a substantial number of shares, and they help establish a more realistic value for the shares considering the challenges of selling them in bulk.
Book Basis
Book basis refers to the value of an asset or liability as recorded in a company's financial statements.
Book Value
Book value is the value of an asset or a company as shown on its financial statements. It is calculated by subtracting the liabilities from the assets. For individual assets, book value is the original cost minus depreciation. For a company, it is the assets minus the debts. Book value gives an idea of the net worth of an asset or a company. However, it may not represent the current market value. Book value is used in financial analysis and comparing the market value to assess valuation.
Business
A business is an organization that operates to make money by providing goods or services to customers. Its main goal is to generate profits. Businesses can take different forms, like sole proprietorships, partnerships, or corporations. They serve customers and aim to meet their needs while facing risks and seeking financial rewards. Businesses have owners who control them and follow certain rules and structures. They contribute to the economy, create jobs, and play a role in society.
Business Combination
A business combination is a transaction or event in which one company acquires control over one or more businesses. This can involve the purchase of a controlling interest in another company, merging with another company, or acquiring its net assets.
Business Enterprise
A business enterprise is an organization that operates to make money by providing goods or services. It includes all aspects of the business, like its owners, operations, resources, and goals. It engages in economic activities, has a structure and hierarchy, and uses resources to meet customer needs and earn profits. It faces risks and seeks rewards in the market. A business enterprise can take different legal forms and operates within specific industries.
Business Risk
Business risk refers to the possibility of negative events or uncertainties that can harm a business's financial performance or operations. These risks can come from various sources, such as changes in the market, financial issues, operational problems, legal and regulatory compliance, reputation damage, or environmental factors. Managing business risks involves identifying and addressing potential problems to protect the business and ensure its long-term success.
Business Valuation
Business valuation is the process of determining the monetary value of a business. It involves assessing various factors like the company's financial performance, assets, market conditions, and industry trends. Valuation is done for purposes such as buying or selling a business, mergers and acquisitions, fundraising, financial reporting, or legal disputes. Different methods are used to calculate the value, taking into account factors like earnings, comparable companies, and assets. Professionals with expertise in valuation perform this assessment to help inform business decisions and transactions.
Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model (CAPM) is a financial tool used to estimate the expected return on an investment based on its risk. It considers two types of risks: systematic risk and unsystematic risk. Systematic risk is the risk related to the overall market, while unsystematic risk is specific to a particular company or industry and can be reduced through diversification. The CAPM formula is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate) The formula takes into account the risk-free rate, which represents the return on a risk-free investment, and beta, which measures the investment's sensitivity to market movements. The market return reflects the average return expected from all investments in the market. By using the CAPM, investors can estimate the appropriate return they should expect for taking on a certain level of risk. However, it's important to note that the CAPM relies on certain assumptions that may not always hold true in practice. In simpler terms, the CAPM helps investors determine how much return they should expect based on the riskiness of an investment compared to the overall market.
Capitalization
Capitalization refers to the total value of a company's stocks, bonds, and other financial instruments. It represents the combined worth of all the company's outstanding securities. It's commonly used to measure the size and value of a company in the market. Market capitalization, specifically, refers to the value of a company's outstanding shares. It helps investors and analysts understand the relative size and valuation of a company.
Capitalization Factor
A capitalization factor, also known as a cap rate, is a percentage used to estimate the value of an income-producing property or business. It is determined by dividing the Net Operating Income (NOI) by the purchase price or value of the property/business. The capitalization factor reflects the rate of return an investor would expect to receive. A higher capitalization factor suggests a lower value and potentially higher risk, while a lower capitalization factor indicates a higher value and potentially lower risk. The capitalization factor is used alongside other methods to determine the value of an investment.
Capitalization of Earnings Method
The Capitalization of Earnings Method is a way to determine the value of a business or investment based on its expected future earnings. It involves dividing the projected earnings or cash flows by a capitalization rate. The capitalization rate reflects the expected return on investment and the level of risk associated with it. By using this method, investors can estimate the value of an investment based on its income potential. However, it's important to consider other factors and valuation methods for a more accurate assessment.
Capitalization Rate
The capitalization rate, or cap rate, is a percentage used in real estate and business valuation to estimate the potential return on investment. It is calculated by dividing the net operating income (NOI) of the property or business by its value or purchase price. A higher cap rate indicates a higher potential return but may also suggest higher risk, while a lower cap rate suggests a lower potential return with potentially lower risk. The cap rate is used by investors and appraisers to estimate the value of income-generating properties or businesses. By applying the cap rate to the net operating income, they can get an approximation of the investment's value. It's important to consider other factors and valuation methods alongside the cap rate for a more accurate assessment. The cap rate is influenced by factors such as location, property type, market conditions, and risk profile.
Capitalization Structure
Capitalization structure, or capital structure, refers to how a company raises money to fund its operations. It is the mix of debt and equity used by a company. Debt includes borrowed money that needs to be repaid with interest, while equity represents ownership in the company. The capitalization structure shows the proportion of debt and equity in a company's overall financing. A high debt-to-equity ratio means more reliance on debt, while a lower ratio means more reliance on equity. The capitalization structure is important for financial stability and managing risk. It can change over time as companies raise funds or repay debt.
Carve Out
A carve-out is a business strategy in which a company sells a portion of its business, often a subsidiary or a specific division, to an outside party, typically while retaining a stake in the entity.
Cash Flow
Cash flow refers to the movement of money in and out of a business or individual's accounts. It shows how much money is coming in and going out during a specific time. Positive cash flow means more money is coming in than going out, while negative cash flow means more money is going out than coming in. There are three types of cash flow: operating cash flow (from day-to-day business activities), investing cash flow (related to buying or selling assets), and financing cash flow (associated with raising or repaying funds). Analyzing cash flow helps understand a business's financial health and ability to meet its obligations.
Cash flow from Financing Activities (CFF)
Cash flow from financing activities is a section of a company's cash flow statement that shows the cash transactions related to funding the business. This includes cash inflows and outflows from transactions involving equity, debt, and dividends.
Cash Flow from Investing Activities (CFI)
Cash flow from investing activities is a section of a company's cash flow statement that reports the cash flows related to the acquisition and disposal of long-term assets and other investments.
Cash Flow from Operation (CFO)
Cash flow from operating activities is a section of a company’s cash flow statement that shows the cash generated or used by the core business operations during a specific period.
Cash Ratio
Measures the ability to cover short-term obligations with cash and cash equivalents alone.
Change-in-Control Event
A change-in-control event refers to a significant shift in the ownership or management of a company that typically triggers specific provisions or clauses in contracts, agreements, or regulations.
Changes in Operating Capitals
Changes in operating working capital (OWC) refer to the variations in the short-term assets and liabilities used in a company's day-to-day operations. Operating working capital typically includes current assets such as accounts receivable, inventory, and current liabilities like accounts payable.
Common-Size Statements
Common-size statements are financial reports that present information in a standardized format, making it easier to compare and analyze data. In these statements, each line item is shown as a percentage of a base amount, such as total assets or total sales. This allows for a better understanding of the proportions and trends within the financial statements. Common-size statements help in comparing companies of different sizes or industries, identifying areas of strength or weakness, and making informed decisions. They provide a standardized way to analyze financial information and spot patterns or changes over time.
Consideration
Consideration is a fundamental concept in contract law referring to something of value that is exchanged between parties to form a binding contract.
Consolidated Cash Flow Statement
A consolidated cash flow statement is a financial report that shows the combined cash flow activities of a parent company and its subsidiaries. It provides a comprehensive overview of the cash inflows and outflows for the entire corporate group, rather than just the parent company alone.
Contingent Consideration
Contingent consideration refers to a payment arrangement in a business acquisition where the buyer agrees to pay additional amounts to the seller if certain future conditions or performance targets are met.
Control
Control refers to the power and authority to direct the activities, policies, and management decisions of an entity, typically a subsidiary or another business, through ownership of voting shares, contractual agreements, or other means
Control Premium
Control premium refers to the extra value or premium that someone is willing to pay for the ability to have control over a company. When a person or entity buys a controlling interest in a company, they gain certain advantages like decision-making power and influence. The control premium is the additional amount they are willing to pay for these benefits. The premium can vary based on factors like the company's size, profitability, and growth potential. It is often expressed as a percentage or dollar amount above the company's fair market value. The control premium is considered in situations like mergers, acquisitions, and business valuations. It represents the value placed on having control over a company's operations and direction.
Cost Approach
The cost approach is a method used to determine the value of a property or asset. It calculates the value based on the cost to reproduce or replace the property. This involves estimating the cost of building a similar property from scratch, considering factors like materials and labor. The estimated cost is then adjusted for depreciation, and the value of the land is added to arrive at the final value. The cost approach is often used for new constructions or properties without comparable sales or income data. However, it may not be suitable for properties with unique features or significant obsolescence.
Cost of Capital
The cost of capital is the expense a company incurs to obtain funds for its operations and investments. It represents the minimum return a company needs to generate to satisfy its investors and lenders. It consists of the cost of debt (interest expense and fees associated with borrowing money) and the cost of equity (the return expected by shareholders). The weighted average cost of capital (WACC) is a common measure that considers the proportion of debt and equity in the company's capital structure. The cost of capital helps companies assess investment opportunities and make financial decisions. It is used to compare potential returns with the cost of financing and plays a role in determining the appropriate discount rate for future cash flows.
Debt Covenants
Debt covenants are conditions or restrictions set by lenders in a loan agreement to protect their interests. These covenants are designed to ensure that the borrower maintains certain financial and operational standards. If the borrower violates these covenants, it may result in penalties, higher interest rates, or even the loan being called due immediately.
Debt-for-debt Swap
A debt-for-debt swap is a financial transaction where a company exchanges its existing debt obligations for new debt with different terms.
Debt-for-equity Swap
A debt-for-equity swap is a financial restructuring strategy where a company's creditors agree to exchange a portion or all of their debt for equity in the company.
Debt-Free
Debt-free means not owing any money or having any outstanding loans or debts to repay. It refers to a situation where a person or organization has successfully paid off all their debts and doesn't owe any money to lenders or creditors. Being debt-free provides financial freedom and relief from the burden of ongoing debt payments. It allows individuals and organizations to focus on saving, investing, and achieving their financial goals without the constraint of debt. Being debt-free is considered a positive financial state as it brings peace of mind and greater control over one's financial situation.
Deferred Taxes
Deferred taxes refer to the tax liabilities or assets that a company recognizes due to differences between the accounting treatment of income and expenses and their treatment for tax purposes. These differences can arise because certain items are recognized in one period for accounting purposes but in another period for tax purposes.
Determining the Acquisition Date
Determining the acquisition date involves identifying the specific date when a company gains control over an acquired asset or business. This date is critical for accounting purposes, as it affects how the acquisition is recorded in the company's financial statements and when the company starts recognizing any related revenue, expenses, or liabilities.
Discontinued Operation
Discontinued operations refer to parts of a company's business that have been sold, disposed of, or otherwise terminated.
Discount for Lack of Control
Discount for Lack of Control (DLOC) is a reduction in the value of a minority ownership stake in a company or asset because the owner has limited control over decision-making. When someone holds a minority stake, they may not have a say in important business decisions. The DLOC reflects this lack of control and is applied when valuing the ownership interest. It considers factors like the size of the stake, the control held by majority owners, and market conditions. The discount compensates buyers for the risks and limitations of owning a minority stake, as controlling interests are typically more valuable.
Discount for Lack of Marketability
Discount for Lack of Marketability (DLOM) refers to the reduction in the value of an investment because it is not easily sold or traded on the market. When an investment is hard to sell quickly or at a fair price, it becomes less attractive to buyers. This discount is applied to account for the difficulty in converting the investment into cash. Factors like the absence of an established market, legal restrictions, or limitations on transferability can contribute to a lack of marketability. The DLOM is a percentage reduction from the estimated fair market value and compensates buyers for the risks and extra effort associated with owning an illiquid investment.
Discount for Lack of Voting Rights
Discount for Lack of Voting Rights (DLOVR) refers to a reduction in the value of an ownership interest because the owner has limited or no voting rights. When someone lacks voting rights or has restricted voting rights, they have less control and influence over important decisions. This discount is applied to account for the reduced control and influence, reflecting the lower value of the ownership interest. It is typically used when different classes of shares have different voting rights. The discount is determined based on the extent of the voting rights restriction and other market factors. The purpose of the discount is to compensate buyers or investors for the risks and limitations associated with owning shares with limited or no voting rights.
Discount Rate
The discount rate is a number used to calculate the current value of future money. It considers the idea that money received in the future is worth less than money received today. The discount rate takes into account factors like risk, expected return, and the time value of money. It is usually expressed as a percentage and helps in determining the present value of future cash flows or monetary amounts. A higher discount rate means a higher level of risk or required return, while a lower discount rate indicates a lower level of risk or required return.
Discounted Cash Flow Method
The discounted cash flow (DCF) method is a way to determine the value of an investment or business based on its expected future cash flows. It involves estimating the cash flows the investment is expected to generate and calculating their present value by considering the time value of money. The present value is found by applying a discount rate that reflects the risk and return expectations. By summing up the present values of all the cash flows, the DCF method provides an estimate of the investment's value. It helps in making investment decisions by considering the projected cash flows and the discount rate.
Discounted Future Earnings Method
The Discounted Future Earnings Method is a valuation approach used to estimate the value of a business or investment based on its projected future earnings. It involves projecting the earnings the business is expected to generate over a specific period and then determining a capitalization rate to calculate the present value of those earnings. The method considers the time value of money and helps investors and analysts assess the value of an investment based on its expected future earnings.
Disposal of Subsidiaries
Disposal of subsidiaries refers to the process in which a parent company sells or divests its interest in one of its subsidiary companies. This can involve selling the subsidiary's shares, its assets, or through other means of transferring ownership.
Divestiture
Divestiture refers to the process of a company selling, liquidating, or otherwise disposing of a business unit, subsidiary, or asset.
Dividend Received Deduction (DRD)
The Dividends Received Deduction (DRD) is a tax deduction available to corporations in the United States that receive dividends from other domestic corporations.
Dual Listed Companies (DLC)
Dual listed companies refer to companies that are listed on more than one stock exchange, allowing their shares to be traded in multiple markets.
Economic Benefits
Economic benefits are the positive financial advantages gained from economic activities. They include things like profits, income, wages, wealth creation, and consumer benefits. Economic benefits can improve individuals' financial well-being, help businesses grow, and contribute to the overall development of society. They can also include social and environmental benefits that enhance people's lives and promote sustainability.
Economic Life
Economic life refers to the period when an asset or investment is useful and generates economic benefits. It is the time frame when the asset is productive and can generate income or returns. Economic life is influenced by factors like the asset's condition, market demand, and obsolescence. It is usually shorter than the asset's physical life. Determining economic life helps with financial planning and decision-making about when to replace or dispose of an asset. Different industries and assets have varying economic lives based on factors like technology and demand. Overall, economic life tells us how long an asset will be economically useful.
Effective Date
The effective date is the specific date when something becomes official or legally valid. It's the date from which rights and obligations start and the terms of an agreement or event come into effect. It is important because it marks the beginning of when parties are legally bound by the terms and conditions specified. For example, in a contract, the effective date is when the contract becomes valid and the parties must follow its terms. It ensures clarity and establishes a starting point for legal and business matters.
Efficiency Ratio
The efficiency ratio is a financial metric used to evaluate how well a company uses its assets and manages its operations to generate income.
Enterprise
An enterprise is a business or organization that operates to make money. It involves all the things a business does, like making and selling products, marketing, managing finances, and running operations. Enterprises can be small local businesses or big multinational companies. They play an important role in the economy by creating jobs and driving economic growth.
Equity
Equity refers to ownership in something, like a business or property, after subtracting any debts. In business, equity often refers to shareholders' ownership in a company. It represents the portion of assets that belongs to shareholders. Equity can also mean fairness or justice in different areas of life. When talking about equity investments, it means owning shares in a company and having the right to share in its profits and decision-making.
Equity Method
The equity method is an accounting technique used by a company to record its investment in another company, typically when it owns 20-50% of the investee's shares and can exert significant influence over it. Under the equity method, the investment is initially recorded at cost, and the investor adjusts the carrying amount of the investment to recognize its share of the investee’s profits or losses.
Equity Net Cash Flows
Equity net cash flows refer to the amount of cash that remains for the owners or shareholders of a business after considering all the cash inflows and outflows. It shows how much cash is available to distribute to the owners. Positive equity net cash flows mean the business generated cash that can be given to shareholders, while negative equity net cash flows mean the business used cash for various purposes. The cash flows can come from operating activities, financing activities (like dividends or equity issuances), or investing activities (such as asset purchases or sales). Equity net cash flows provide insights into the cash returns for the owners of the business.
Equity Risk Premium
The equity risk premium is the extra return that investors expect to receive for investing in stocks compared to safer investments. It represents the compensation for taking on the higher risk associated with stocks. Investors demand this premium as a reward for dealing with the uncertainty and volatility of the stock market. The equity risk premium can change based on economic conditions, investor sentiment, and other factors. It is used to estimate the potential return on stocks and is an important factor in investment decisions.
Excess Earnings
Excess earnings are the profits a company makes that go beyond a reasonable return on its tangible assets. These earnings are attributed to intangible assets like brand value or intellectual property. Excess earnings are important in business valuation as they capture the additional value provided by these intangible assets. It helps assess the company's overall worth and potential for future earnings. Determining excess earnings involves separating the impact of tangible and intangible assets on a company's earnings.
Excess Earnings Method
The excess earnings method is a way to estimate the value of a business based on its ability to generate profits that go beyond a reasonable return on its physical assets. It is used when a company has valuable intangible assets like brand recognition or patents that contribute to its earnings. The method involves valuing the physical assets separately, determining a reasonable return on those assets, and then calculating the excess earnings by subtracting the expected return from the actual earnings. This excess earnings value represents the contribution of the intangible assets. Finally, this value is used to estimate the overall value of the business. The method assumes that the excess earnings will continue in the future. It helps provide a more complete picture of a business's worth by considering the value of intangible assets.
Fair Market Value
Fair market value is the estimated price at which an asset would be sold between a willing buyer and a willing seller in an open market. It's the value that both parties agree upon when they have all the necessary information and are not under pressure to make the transaction. Fair market value is determined by considering factors like the characteristics of the asset, market conditions, and expert opinions. It's commonly used in business valuation, legal matters, and taxes. The concept assumes a fair and unbiased transaction in a competitive market.
Fair Value Through Other Comprehensive Income (FVOCI)
Fair Value Through Other Comprehensive Income (FVOCI) is a classification for certain financial assets under the International Financial Reporting Standards (IFRS). When an asset is designated as FVOCI, any changes in its fair value are recorded in "Other Comprehensive Income" (OCI) rather than directly in the profit and loss statement.
Fair Value Through Profit and Loss (FVTPL)
Fair Value Through Profit and Loss (FVTPL) is an accounting classification for certain financial assets and liabilities. Under this method, changes in the fair value of these assets and liabilities are recognized directly in the profit and loss statement as they occur.
Fairness Opinion
A fairness opinion is an assessment provided by an independent expert about whether a proposed financial transaction is fair. It helps the parties involved, such as the board of directors or shareholders, make informed decisions. The opinion considers factors like the financial terms, market conditions, and the value of the company or assets involved. It is presented in a written report and provides an unbiased analysis of the transaction's fairness. However, it doesn't guarantee the transaction's success.
Financial Risk
Financial risk refers to the possibility of losing money or facing negative consequences in financial matters. It arises from factors like market changes, economic downturns, credit problems, currency fluctuations, and regulatory changes. Financial risk can affect a company's profits, cash flow, and overall financial stability. It includes risks related to market conditions, credit defaults, cash availability, operational issues, and compliance with regulations. To manage financial risk, companies assess potential risks, use strategies like diversification and insurance, and stay informed about market conditions.
Financial Statement Analysis (FSA)
Financial statement analysis is the process of reviewing and evaluating a company’s financial statements to gain an understanding of its financial health and performance.
Financial Statement Reformulation
Financial statement reformulation is the process of reorganizing and adjusting a company's financial statements to provide a clearer and more meaningful analysis of its financial performance and condition.
Forced Liquidation Value
Forced liquidation value refers to the amount of money you could get from selling something quickly and under urgent circumstances. It's usually lower than the normal value because you might have to sell it at a discount to attract buyers in a hurry. This value is used when there's a need to sell assets quickly, like in financial distress or bankruptcy situations. It takes into account the costs of the sale and represents a conservative estimate of what you could get in a forced sale.
Free Cash Flow
Free cash flow (FCF) is the amount of cash a company generates after deducting its expenses and investments. It shows how much cash is available to the company for things like expanding the business, paying dividends, or reducing debt. Positive FCF means the company is making more cash than it spends, while negative FCF means it's spending more than it makes. FCF is an important measure of a company's financial health and its ability to generate cash.
Full Fair Value Method
The full fair value method is an accounting approach used to measure the fair value of non-controlling interests (NCI) in a subsidiary at the acquisition date. Under this method, the entire subsidiary, including both the controlling interest (owned by the parent company) and the non-controlling interest, is valued at fair value.
Gain from Bargain Purchase
Gain from bargain purchase occurs when a company acquires another company for less than the fair value of its identifiable net assets. This situation can arise during business combinations where the purchase price is lower than the net fair value of the acquired assets minus liabilities.
Going Concern
Going concern means that a business is expected to continue operating for the foreseeable future without any plans to close down. It assumes that the company will generate enough money to meet its financial obligations and keep running. This assumption is important for financial reporting and helps stakeholders understand the company's future prospects and financial stability.
Going Concern Value
Going concern value refers to the total worth of a business when it is expected to keep operating in the future. It includes the value of its assets, customer base, reputation, and potential earnings. This value is higher than the value of selling off the business in pieces. It helps buyers and investors understand the overall value of the business considering its ongoing operations and future potential.
Goodwill
Goodwill is an intangible asset that arises when a company acquires another company for more than the fair value of its identifiable net assets.
Goodwill Value
Goodwill value is the financial worth assigned to the intangible assets of a business, like its reputation and customer relationships. It represents the extra amount paid when acquiring a company, beyond the value of its physical assets. Goodwill value reflects the potential future benefits and advantages that come with those intangible assets. It is important in evaluating the overall value of a company, especially during acquisitions or valuations.
Guideline Public Company Method
The Guideline Public Company Method is a way to value a private company by comparing it to similar publicly traded companies. It involves looking at the financial information and market ratios of these public companies and using them as a reference to estimate the value of the private company. This method assumes that the market has accurately priced the public companies and that their ratios can be applied to the private company to determine its value. However, adjustments may be needed to account for any differences between the private and public companies.
Held to Maturity Securities (HTM)
Held to maturity (HTM) securities are financial assets that a company intends and is able to hold until they reach their maturity date. These are typically fixed-income investments like bonds, which pay periodic interest and return the principal amount at maturity.
Identifiable Assets Acquired
Identifiable assets acquired refer to specific assets that a company obtains when it purchases another company or its business units. These assets can be individually recognized and valued. Identifiable assets include both tangible assets (like equipment, inventory, and buildings) and intangible assets (like patents, trademarks, and customer relationships).
Identifying the Acquirer
Identifying the acquirer involves determining which entity is the buyer in a business combination. The acquirer is typically the entity that obtains control over the other entity.
Impairment of Goodwill
Impairment of goodwill occurs when the carrying value of goodwill on a company’s balance sheet exceeds its fair value, indicating that the value of the acquired business has declined.
Income (Income-Based) Approach
The Income Approach is a method used to determine the value of a business or investment based on its expected income. It focuses on the income or cash flow the business is expected to generate in the future. This approach assumes that the value of a business is tied to its ability to generate income. Different techniques, like discounted cash flow or capitalization of earnings, are used to estimate the present value of future income. The Income Approach is useful for valuing businesses that generate consistent income and helps assess their profitability and investment potential.
Income Statement Reformulation
Income statement reformulation involves reorganizing the information in an income statement to provide a clearer view of a company's financial performance and underlying economic activities.
Indefinite-life intangibles
Indefinite-life intangibles are non-physical assets that a company owns, which have no foreseeable limit to the period over which they are expected to generate economic benefits. Unlike finite-life intangibles, which are amortized over their useful lives, indefinite-life intangibles are not amortized but are instead tested annually for impairment.
Initial Public Offering (IPO)
An Initial Public Offering (IPO) is the process by which a private company offers its shares to the public for the first time and becomes a publicly traded company. This process allows the company to raise capital from public investors to fund expansion, pay off debt, or achieve other corporate goals.
Intangible Assets
Intangible assets are valuable assets that a business owns but cannot be physically touched or seen. They include things like patents, trademarks, copyrights, customer relationships, and brand reputation. These assets provide long-term benefits and contribute to a company's value and competitive advantage. Intangible assets are important for businesses and are recognized on their balance sheets. They need legal protection and management to preserve their value. Understanding and valuing intangible assets is essential for making business decisions and determining a company's worth.
Intangibles
Intangibles are non-physical assets that a company owns, which provide value and potential future benefits but do not have a physical presence. These assets can include intellectual property, brand reputation, trademarks, patents, copyrights, goodwill, and customer relationships.
Interest Coverage Cash Flows
Interest coverage cash flows refer to a financial metric that measures a company's ability to meet its interest payment obligations using its operating cash flows. This ratio helps assess the financial health of a company and its capacity to cover interest expenses from the cash generated by its core business operations.
Interest Coverage Ratio
The interest coverage ratio is a financial metric used to determine how easily a company can pay interest on its outstanding debt. It measures the company's ability to meet its interest obligations from its earnings before interest and taxes (EBIT).
Internal Rate of Return
The Internal Rate of Return (IRR) is a way to measure how profitable an investment or project is. It tells you the rate at which you can expect to earn back the money you initially put into the investment. If the IRR is higher than the rate of return you expect or require, then the investment is considered good. If it's lower, the investment may not be as attractive. Calculating the IRR takes into account the timing and amount of future cash flows from the investment. It helps you assess the potential profitability of an investment opportunity.
Internal Revenue Code (IRC)
The Internal Revenue Code (IRC) is the comprehensive set of tax laws created by the United States Congress. It governs federal tax administration, including income tax, estate tax, gift tax, employment tax, and excise tax.
Intrinsic Value
Intrinsic value is the true or underlying value of an asset, investment, or business. It is based on factors like its cash flow, earnings potential, and growth prospects. Unlike market value, which can be influenced by supply and demand, intrinsic value focuses on the inherent worth of the asset itself. Investors use intrinsic value to identify assets that may be undervalued and offer potential for profitable investments. Methods like discounted cash flow analysis or comparison to similar assets can be used to calculate intrinsic value. Determining intrinsic value is subjective and can vary among analysts. In essence, it's the real value of an asset beyond what it currently sells for in the market.
Invested Capital
Invested capital refers to the total amount of money and resources that have been put into a business. It includes the funds contributed by investors or shareholders, both in the form of equity (ownership stake) and debt (borrowed money). This capital is used to finance the operations and growth of the business. Invested capital is important for assessing the financial health of a company and is used to fund expenses and investments. It helps measure profitability and return on investment. Essentially, invested capital is the total amount of money and resources that have been invested in a business.
Invested Capital Net Cash Flows
Invested Capital Net Cash Flows refers to the net amount of cash generated by the capital invested in a business or project. It takes into account the cash inflows and outflows directly related to the invested capital. This includes the cash generated by assets and investments financed by the capital, as well as any cash flows associated with debt repayment or equity returns. By analyzing these cash flows, investors and analysts can assess the financial performance and profitability of the invested capital. It helps in making investment decisions and evaluating the overall financial health of a company or project. In simpler terms, it's the net cash flow generated by the money invested in a business.
Investment Risk
Investment risk means the chance that an investment may not go as expected and could result in losses or unpredictable returns. It is the uncertainty associated with investing money and the possibility of not achieving the desired financial outcome. Different investments carry different levels of risk. Higher-risk investments offer the potential for higher returns, but they also have a higher chance of losing money or being unpredictable. Lower-risk investments provide more stable returns but with limited potential for significant gains. Investors consider factors like past performance, market conditions, and company information to assess investment risk. They may also diversify their investments across different assets or sectors to manage risk. Understanding and managing investment risk is important for making informed investment decisions.
Investment Value
Investment value refers to how much an investment is worth based on its expected future returns. It represents the value an investor sees in an investment opportunity considering factors like potential income, growth, and other financial gains. The actual value may vary between investors since everyone has different perspectives and preferences. Investment value is assessed by considering projected cash flows, risks, market conditions, and personal investment goals. Investors use methods like discounted cash flow analysis to estimate investment value. In simpler terms, investment value is the worth of an investment based on its expected returns and benefits.
Joint Control
Joint control refers to a situation where two or more parties share control over a business or project. Joint control is common in joint ventures and certain partnerships, ensuring that no single party can unilaterally dictate the direction of the business.
Junk Bonds
Junk bonds, also known as high-yield bonds, are corporate bonds that carry a higher risk of default compared to investment-grade bonds. Because of this higher risk, they offer higher interest rates to attract investors.
Key Person Discount
A key person discount is a reduction in the value of a business or investment when an important person associated with it is no longer involved. This discount recognizes the potential negative effects on the business without that key person. It accounts for risks like loss of expertise, relationships, and leadership, which can impact the business's performance and reputation. The discount reflects the lowered value due to the uncertainty and challenges caused by the absence of the key person.
Leveraged Buyouts (LBOs)
A leveraged buyout (LBO) is a financial transaction in which a company is purchased using a significant amount of borrowed money, typically through loans or bonds. LBOs are commonly used by private equity firms to acquire companies, aiming to improve their profitability and then sell them for a profit.
Leveraged Recapitalisation
Leveraged recapitalization is a financial strategy in which a company takes on significant new debt to pay a large dividend or buy back shares. The primary goals of leveraged recapitalization are to return cash to shareholders, restructure the company’s balance sheet, and potentially ward off hostile takeovers.
Levered Beta
Levered beta, or equity beta, is a measure of how a company's stock price moves in relation to the overall market. It considers the impact of the company's debt on its stock's volatility. A levered beta greater than 1 means the stock is more volatile than the market, while a levered beta less than 1 means it's less volatile. Levered beta helps investors understand the risk and potential return of a stock. It considers the company's debt levels and interest payments when evaluating how the stock reacts to market changes.
Limited Appraisal
Limited appraisal refers to a condensed or restricted assessment of an asset's value. It involves a focused analysis that may not provide as much detail as a full appraisal. The appraiser concentrates on specific aspects relevant to the appraisal purpose, which may result in limitations due to factors like data availability or time constraints. While it may not offer a comprehensive understanding, a limited appraisal can still provide useful insights for specific purposes. It's important to be aware of its scope and limitations and ensure they align with the appraisal requirements.
Liquidation Value
Liquidation value is the estimated worth of an asset or business if it were to be sold quickly. It takes into account the urgency of the sale and the need to convert assets into cash swiftly. In a liquidation, assets may be sold at a lower value than their market or book values. Liquidation value considers factors like market conditions and the costs involved in the selling process. It is used in situations such as bankruptcy or when assessing the value of distressed businesses. It provides an estimate of the amount that could be recovered from the quick sale of assets.
Liquidity
Liquidity refers to how easy it is to buy or sell an asset without affecting its price. High liquidity means it's easy to trade the asset, while low liquidity means it's harder to find buyers or sellers. Liquidity is important for investors because it affects how quickly they can convert an asset into cash. Assets like stocks and government bonds are highly liquid, while certain real estate or private company shares may have low liquidity. Monitoring liquidity helps ensure smooth markets and financial stability.
Majority Control
Majority control means having enough ownership or voting power in a company to make important decisions and have a significant influence. When someone or a group holds a majority of shares or voting rights, they can determine the company's direction, choose key executives, and approve major transactions. It gives them the power to shape the company according to their interests. However, there are still rules and protections in place to ensure fairness and protect the rights of minority shareholders.
Majority Interest
Majority interest means having more than half of the ownership or control in a company. When someone or a group has majority interest, they can make important decisions and have a strong influence on the company. They can shape its direction, elect the majority of the board of directors, and control key aspects of the business. However, they must still act in the best interests of the company and its shareholders.
Management Buy-in (MBI)
A Management Buy-In (MBI) is a type of acquisition where an external management team buys a significant stake in a company and takes over its management. This new management team is typically composed of experienced professionals who believe they can improve the company's performance and value.
Management Buyout (MBO)
A Management Buyout (MBO) is a transaction where a company's existing management team acquires a significant portion or all of the company's assets and operations. This type of buyout often occurs when the current owners want to exit the business, either due to retirement, divestment, or strategic reorganization.
Market (Market-Based) Approach
The market (market-based) approach is a way to determine the value of an asset by looking at the prices of similar assets that have recently been sold. It assumes that the market price of similar assets reflects their fair value. The approach involves comparing the asset being valued to similar assets in terms of industry, size, location, and other relevant factors. By analyzing the selling prices of these comparable assets, a valuation expert can estimate the value of the subject asset. The market approach is based on the idea that the market knows best and provides a useful reference for valuing an asset. However, it has limitations, such as the availability of comparable data and the assumption that market prices always reflect true value.
Market Capitalization of Equity
Market capitalization of equity refers to the total value of a company's outstanding shares of common stock in the stock market. It is calculated by multiplying the current stock price by the total number of shares. Market cap helps to determine the size and value of a company. Higher market cap means a larger company, while lower market cap indicates a smaller company. It is an important metric used by investors to compare companies and make investment decisions.
Market Capitalization of Invested Capital
Market Capitalization of Invested Capital refers to the total value of a company's equity and debt components in the market. It is calculated by adding the market value of the company's outstanding shares of stock to the market value of its outstanding debt. This metric provides an indication of the overall market perception of a company's value, taking into account both equity and debt holders' interests. It represents the amount of money investors are willing to pay for a company's ownership and debt claims in the open market.
Market Multiple
A market multiple is a way to compare the value of a company or asset to other similar companies or assets in the market. It's calculated by dividing the market value of the company or asset by a financial metric like earnings or sales. The resulting ratio can be compared to similar companies or assets to determine if it's undervalued or overvalued. Market multiples are commonly used to value publicly traded companies, but can also be used for private companies or assets.
Marketability
Marketability refers to how easy it is to buy or sell an asset. If something has high marketability, it can be quickly and easily traded in the market. Assets like stocks or bonds are highly marketable because there are many buyers and sellers. On the other hand, assets like real estate or private company shares may have lower marketability because it can be harder to find someone willing to buy or sell them. Marketability is important because it affects how quickly you can turn an asset into cash.
Merger and Acquisition Method
The Merger and Acquisition (M&A) Method is a way to estimate the value of a company by analyzing the prices paid for similar companies in recent mergers and acquisitions. This method looks at financial metrics like price-to-earnings or price-to-sales ratios used in these transactions and applies them to the subject company's own financial metrics. The resulting estimate is adjusted to account for any differences between the subject company and the comparison companies. The M&A Method is one of several methods used in business valuation to estimate the value of a company or business.
Midyear Discounting
Midyear discounting is a financial calculation that adjusts the present value of a future cash flow or investment to account for the fact that it occurs at some point during the year, rather than at the beginning or end. This adjustment assumes that the cash flow or investment occurs halfway through the year and adjusts the present value accordingly. Midyear discounting is commonly used in financial modeling and analysis to calculate the net present value of a project or investment.
Minority Discount
A minority discount is a reduction in the value of a minority ownership interest in a business or asset, relative to the value of a controlling interest. This is because the owner of a minority interest has less control over the business or asset, which can limit their ability to influence decisions. The amount of the minority discount can vary depending on factors such as the level of control held by the majority owner, the size and complexity of the business or asset, and the legal and regulatory environment. Minority discounts are often considered in business valuation to determine the fair market value of a minority ownership interest.
Minority Interest
Minority interest refers to a situation where an investor or group of investors own less than half of a company's shares or voting rights. They do not have the power to control the company's decisions or operations, but may have certain rights such as voting on certain issues or receiving dividends. It is important in determining the ownership structure and control of a company.
Multiple
A multiple is a way of comparing different companies or investments based on financial metrics. It is used to determine their relative value and potential for growth. Common multiples include the price-to-earnings (P/E) multiple, price-to-sales (P/S) multiple, and enterprise value-to-EBITDA (EV/EBITDA) multiple.
Multiples
Multiples are a financial measurement used to evaluate a company's value by comparing it to similar companies. Investors use multiples to assess if a stock is overvalued or undervalued compared to its peers.
Net Book Value
Net book value (NBV) is the value of an asset as recorded on a company's balance sheet after accounting for accumulated depreciation or amortization. It represents the remaining value of an asset that has not yet been fully depreciated or amortized. NBV is an important measure for financial reporting and analysis.
Net Cash Flows
Net cash flows refer to the difference between the total amount of cash a company receives and the total amount it spends during a specific time period. Positive net cash flows mean the company is generating more cash than it spends, while negative net cash flows mean the company is spending more cash than it generates. Net cash flows are an important measure of a company's financial health and performance.
Net Financial Obligation
Net Financial Obligations (NFO) refer to the total amount of financial liabilities a company owes, minus its liquid financial assets.
Net Invested Capital
Net Invested Capital (NIC) refers to the total amount of capital that has been invested in a business by its owners and creditors, net of any cash and cash equivalents.
Net Operating Asset
Net Operating Assets (NOA) refer to the total operating assets of a company minus its operating liabilities.
Net Present Value
Net present value (NPV) is a financial measure used to compare the present value of expected cash inflows to the present value of expected cash outflows for an investment or project. It considers the time value of money, meaning that a dollar received in the future is worth less than a dollar received today. If the net present value is positive, it means the investment is expected to be profitable, while a negative net present value indicates that it's not profitable. NPV is an important tool for evaluating investment projects.
Net Tangible Asset Value
Net tangible asset value (NTAV) is a financial measure used to determine the net value of a company's physical assets, such as property and equipment, after subtracting liabilities and intangible assets. It represents the value of a company's assets that can be easily liquidated. A high NTAV indicates that a company has a strong asset base, while a low NTAV may indicate that a company is heavily reliant on intangible assets or has a high level of debt. This measure is important to assess a company's financial health and performance.
Non-amortizable intangibles
Non-amortizable intangibles are assets that cannot be gradually written off over time for accounting purposes. Non-amortizable intangibles maintain their value indefinitely and are not subject to systematic depreciation or amortization.
Non-Controlling Interest (NCI)
Non-controlling interest (NCI), also known as minority interest, refers to the portion of a subsidiary company’s equity that is not owned by the parent company. In other words, it represents the shares in a subsidiary that are held by outside investors.
Non-GAAP Measures
Non-GAAP measures are financial metrics that do not conform to Generally Accepted Accounting Principles (GAAP). Companies use these alternative performance measures to provide a clearer picture of their financial performance, excluding items they believe are non-recurring, non-cash, or not reflective of their core operations.
Nonoperating Assets
Nonoperating assets are assets that are not used to generate revenue in a company's primary business operations. They are held for investment purposes or other strategic reasons, like providing liquidity or diversifying a company's portfolio. Examples include investments in stocks, bonds, and real estate. Nonoperating assets are reported separately from operating assets and can affect a company's financial performance and valuation. They are important to monitor for assessing a company's overall financial health and performance.
Normalized Earnings
Normalized earnings are a company's earnings that have been adjusted to exclude any unusual or non-recurring events that could affect its financial performance in a given period. This is done to provide a clearer picture of the company's ongoing profitability and to make it easier to compare its performance over time or with other companies in the same industry. Normalized earnings are an important tool for investors and analysts to evaluate a company's financial health and make informed investment decisions.
Normalized Financial Statements
Normalized financial statements are financial statements that have been adjusted to show a company's financial performance under normal or typical conditions, and to exclude any unusual or one-time events that could affect its financial results in a given period. This provides a more accurate picture of the company's underlying financial performance and can be used for financial analysis, forecasting, and valuation. Normalized financial statements are a useful tool for investors and analysts to make informed investment decisions and evaluate a company's financial health.
Off-balance sheet Financing
Off-balance sheet financing refers to a method companies use to keep certain assets or liabilities off their balance sheets. This means these items are not included in the company's official financial statements, often to make the company appear less leveraged or to comply with debt covenants.
Onerous Contracts
Onerous contracts are agreements in which the costs of fulfilling the contract are higher than the benefits received from it. In other words, the contract imposes more financial burden than gain on one of the parties.
Orderly Liquidation Value
Orderly liquidation value (OLV) is an estimate of the value of an asset or group of assets that are being sold in a controlled and planned manner over a reasonable period of time. It represents the amount of money that could be received if the assets were sold without the urgency or pressure of a forced sale. OLV is important for companies considering the sale of assets, as it provides a realistic estimate of what they can expect to receive for those assets under normal market conditions. It is affected by factors such as the condition of the assets, current market conditions, and demand for the assets. OLV is used to assess the value of assets in a liquidation scenario.
Organic Growth
Organic growth refers to the increase in a company's revenue, market share, or other key metrics that comes from its existing operations, rather than through mergers, acquisitions, or other external factors. This type of growth is achieved through internal strategies such as enhancing sales, expanding product lines, improving customer service, or entering new markets.
Other Postretirement Benefits
Postretirement benefits refer to benefits that a company provides to its employees after they retire, in addition to pension plans. These benefits typically include health care, life insurance, and other forms of non-pension benefits. They are part of the total compensation package designed to support employees in their retirement years.
Partial Fair Value Method
The partial fair value method is an accounting approach used to measure the fair value of non-controlling interests (NCI) in a subsidiary at the acquisition date.
Partial Goodwill Method
The partial goodwill method is an accounting approach used in business combinations, specifically for recognizing goodwill. Under this method, only the portion of goodwill that is attributable to the acquirer is recognized, based on the acquirer's ownership interest in the acquiree.
Pension Benefits
Pension benefits refer to the retirement income that an employee receives after leaving employment, typically funded by contributions from both the employer and the employee. These benefits are part of a pension plan, which is a type of retirement plan designed to provide income to employees after they retire.
Pooling of Interest
Pooling of interests is an accounting method used in mergers and acquisitions where the balance sheets of the combining companies are combined without any adjustments to the book values of their assets and liabilities. This method treats the merged companies as if they have always been a single entity.
Portfolio Discount
Portfolio discount is a term used in finance to describe a reduction in the value of a group of assets, like a portfolio of stocks or bonds, that is greater than the sum of the individual assets' values. It is often due to the lack of liquidity or marketability of the assets, which can make it challenging to sell them or attract buyers, resulting in a lower price for the portfolio as a whole. Portfolio discounts are often calculated as a percentage of the net asset value of the portfolio and can impact the returns and performance of the portfolio over time. It's used to assess the risk and potential upside of investing in hard-to-value or illiquid assets.
Premise of Value
Premise of value is the underlying assumptions or conditions used to determine the value of an asset or business. It can vary depending on the context of the valuation and may include assumptions about the future of the business, the type of transaction, or the market conditions. The premise of value is important to define at the outset of a valuation engagement to ensure that all parties involved have a clear understanding of the underlying assumptions and conditions used to determine the value.
Present Value
Present value (PV) is the financial value of a future stream of cash flows or a future lump sum payment, calculated by discounting it back to its value in the present using a discount rate. It helps in comparing cash flows or payments that occur at different times and is used for financial decision-making, like determining the worth of an investment or assessing the value of future cash flows or payments.
Price/Earnings Multiple
Price/earnings multiple (P/E multiple) is a financial ratio used to value a company's stock by dividing its current market price by its earnings per share. It helps to compare the relative value of stocks or companies in the same industry. A higher P/E multiple indicates that investors are willing to pay more for each dollar of earnings, which may reflect a higher growth rate or more favorable outlook. However, it should be used with other metrics and factors to assess a company's financial health and growth prospects. Overall, P/E multiple is a useful tool for investors and analysts to assess the value of a company's stock and market sentiment.
Private Equity
Private equity refers to investment funds that buy, manage, and restructure companies that are not publicly traded on the stock market. Private equity firms aim to improve the performance of these companies and increase their value over time. Eventually, they sell the companies for a profit through various exit strategies, such as selling to another company, taking the company public through an initial public offering (IPO), or other means.
Privatization Transaction
Corporate privatization is when a publicly traded company buys back all of its shares or is acquired by private investors or a private company, making it privately owned and delisting it from the stock exchange.
Profitability Ratios
Profitability ratios are financial metrics used to assess a company's ability to generate profit relative to its revenue, assets, or equity.
Proportionate consolidation
Proportionate consolidation is an accounting method used to report the financial results of a joint venture. Under this method, a company includes its share of the joint venture’s assets, liabilities, income, and expenses in its financial statements.
Purchase Method
The purchase method, also known as the acquisition method, is an accounting approach used in business combinations when one company acquires another. This method requires the acquiring company to record the identifiable assets, liabilities, and any non-controlling interest of the acquired company at their fair values on the acquisition date. Any excess of the purchase price over the fair value of the net identifiable assets is recorded as goodwill.
Purchase Price Allocation (PPA)
Purchase price allocation (PPA) is the process of distributing the purchase price of an acquired company among its identifiable assets and liabilities based on their fair values at the acquisition date.
Pushdown Accounting
Pushdown accounting is a method used in financial reporting where the acquiring company pushes its new basis of accounting down to the acquired company's financial statements.
Quick Ratio
Similar to the current ratio but excludes inventory from current assets, as inventory is less liquid.
Rate of Return
Rate of return (ROR) is a financial measure that calculates the percentage change in the value of an investment over a certain period of time. It shows the total gain or loss on an investment relative to the initial investment, expressed as a percentage. The calculation considers both capital gains/losses and income generated by the investment. ROR allows investors to evaluate the performance of their investments and compare returns of different investment opportunities. It is a crucial concept in finance and investing.
Recapitalisation (RECAPs)
Recapitalisation is a financial strategy used by companies to restructure their capital composition, usually involving a significant change in their debt-to-equity ratio. This process can be initiated to stabilize a company’s balance sheet, reduce financial risk, improve cash flow, or to fend off hostile takeovers.
Redundant Assets
Redundant assets are assets that a company no longer needs or uses but still holds on its balance sheet. These assets tie up resources and capital that could be used for more productive purposes, and may incur ongoing costs such as maintenance or storage. Companies may choose to sell or dispose of redundant assets to free up resources and improve their financial performance. Identifying and addressing redundant assets is important for effective asset management and to reduce costs.
Replacement Cost New
Replacement cost new (RCN) is a method used to calculate the cost of replacing an asset with a new one at current market prices. It doesn't consider any depreciation or obsolescence that may have occurred over time. RCN is commonly used by insurance companies to determine the appropriate level of coverage for a particular asset or property. The calculation takes into account factors such as the current market price of the asset, the cost of materials and labor, and other costs associated with acquiring and installing the asset. Overall, RCN is a tool for assessing the cost of replacing an asset in the event of damage or loss.
Report Date
Report date is the date when a financial report or statement is issued or made public. It reflects the current and accurate financial position and performance of the company or entity being reported on. The report date is important for investors and other users of financial information as it provides a clear indication of the point in time to which the financial information contained in the report pertains. It's used to make investment or business decisions based on that information and to assess a company's financial health and performance.
Reproduction Cost New
Reproduction cost new (RCN) is a method used to calculate the cost of replicating an asset with an identical or equivalent asset using current materials, technology, and construction methods. It estimates the cost of constructing or manufacturing a new asset without considering any depreciation or obsolescence that may have occurred over time. RCN is often used to value assets like buildings or machinery and takes into account the cost of materials, labor, and other expenses associated with constructing or manufacturing the asset. It's a useful tool for assessing the cost of replicating an asset in the event of damage or loss and can also provide valuable information for investors and other stakeholders.
Required Rate of Return
The Required Rate of Return (RRR) is the minimum level of return that an investor expects to earn from an investment in order to compensate for the associated risks. It is the return needed to make the investment worthwhile. The RRR takes into account factors like the investor's risk tolerance and alternative investment options. If the expected return on an investment is higher than the RRR, it may be considered a good investment. On the other hand, if the expected return is lower than the RRR, the investment may be seen as too risky or unattractive. The RRR is subjective and varies from investor to investor. It helps guide investment decisions by providing a benchmark for expected returns.
Residual Value
Residual value refers to the estimated value of an asset at the end of its useful life. It is the value the asset is expected to have when it is no longer useful or productive. The residual value is important because it affects the overall financial calculations and decisions related to the asset. It is typically estimated based on factors like market value, potential resale value, or scrap value. Accurately estimating the residual value helps in determining the profitability and feasibility of an investment or project.
Return on Equity
Return on Equity (ROE) is a measure of how well a company generates profits in relation to the money invested by its shareholders. It shows the percentage of net income that the company earns for each dollar of shareholders' equity. To calculate ROE, divide the company's net income by the shareholders' equity and multiply by 100. A higher ROE indicates that the company is more efficient in using its shareholders' investment to generate profits. ROE is commonly used by investors to evaluate a company's profitability and compare it with similar companies in the industry. However, it's important to consider other financial factors and industry benchmarks when assessing a company's overall financial health.
Return on Equity (ROE)
Return on Equity (ROE) is a financial ratio that measures a company's profitability in relation to the equity held by its shareholders. It indicates how effectively the company is using the investors' funds to generate profits.
Return on Invested Capital
Return on Invested Capital (ROIC) is a measure of how well a company generates profits from the capital it has invested in its operations. It considers both equity and debt investments. A higher ROIC indicates that the company is generating more profit for each dollar of invested capital. It helps investors and analysts assess a company's efficiency in utilizing its capital to generate returns.
Return on Investment
Return on Investment (ROI) is a measure of the profitability of an investment. It shows how much profit or return you get from the money you invest. It is calculated by dividing the net profit or gain from the investment by the cost of the investment, and then expressing it as a percentage. A higher ROI means a better return on your investment. It helps investors and businesses evaluate the financial performance and potential profitability of different investment options.
Reverse Acquisition
A reverse acquisition is a process where a private company acquires a publicly traded company to bypass the lengthy and complex process of going public through an initial public offering (IPO). In this transaction, the private company becomes publicly traded almost immediately.
Risk Premium
Risk premium refers to the extra return that investors expect to earn for taking on additional risk in an investment. It represents the compensation for bearing the uncertainty and potential losses associated with riskier investments compared to a risk-free investment. Essentially, it is the difference between the expected return on a risky investment and the return on a risk-free investment. A higher risk premium reflects a higher level of perceived risk and indicates that investors require a greater reward for taking on that risk. It helps investors assess the potential returns and evaluate the trade-off between risk and reward in their investment decisions.
Risk-Free Rate
The risk-free rate is the return you can expect to earn on an investment without taking on any risk. It represents the minimum level of return that investors would require for investing in an asset that is considered to have no chance of defaulting or losing value. Typically, government bonds or treasury bills are considered risk-free because they are backed by the government. The risk-free rate is used as a reference point for evaluating the potential returns of other investments that carry higher levels of risk.
Rule of Thumb
A rule of thumb is a simple and practical guideline or general principle that helps with making decisions or estimates based on common sense or experience. It's a quick and easy way to get a rough idea or approximation without doing complex calculations. However, it may not be perfectly accurate or suitable for every situation, so it's important to consider the specific circumstances and use it as a starting point rather than a definitive answer.
S Corporation
An S corporation is a special type of corporation in the US that meets specific Internal Revenue Code requirements. The main benefit of an S corporation is that it allows profits to be passed directly to shareholders without being subject to corporate income tax.
Secondary Buyout
A secondary buyout is a financial transaction where a private equity firm sells its investment in a company to another private equity firm. Secondary buyouts can happen for various reasons, such as the original private equity firm wanting to exit the investment to realize gains or the new private equity firm seeing potential for further growth and value creation.
Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) is a U.S. government agency responsible for regulating the securities markets and protecting investors.
Securitization
Securitization is a financial process where various types of assets, such as loans or receivables, are pooled together and then sold as consolidated financial instruments, typically in the form of bonds, to investors.
Share Buyback
A share buyback, also known as a stock repurchase, occurs when a company buys back its own shares from the marketplace. Companies may initiate buybacks to return excess cash to shareholders, signal confidence in their own financial health, or to prevent other shareholders from gaining a controlling stake.
Share-based Payment
A share-based payment is a transaction in which an entity receives goods or services from suppliers or employees as consideration for equity instruments (such as shares or stock options) or incurs a liability to suppliers or employees that is based on the price of the entity's shares.
Solvency Ratio
The solvency ratio is a key financial metric used to measure a company's ability to meet its long-term debt obligations and remain financially healthy over the long term. A higher solvency ratio indicates a stronger ability to meet long-term debts, while a lower ratio may suggest potential financial instability.
Special Interest Purchasers
Special interest purchasers are individuals or companies who have a specific reason for wanting to buy a particular business or asset. They might be competitors, investors, or others who see unique value in the purchase. These buyers are often willing to pay more or offer special terms because they have a strategic goal in mind. Their interest can affect the valuation and negotiation process, as they may place a higher value on certain aspects of the business or asset.
Special Purpose Entity (SPE)
A Special Purpose Entity (SPE), also known as a Special Purpose Vehicle (SPV), is a legal entity created for a specific, narrow purpose. Typically, companies establish SPEs to isolate financial risk.
Spin-Off
A spin-off is a corporate action in which a company creates a new, independent company by separating part of its business. The parent company distributes shares of the new company to its existing shareholders, usually on a pro-rata basis.
Split-Off
A split-off is a type of corporate restructuring where a company creates a new, independent entity and offers its shareholders the option to exchange their shares in the parent company for shares in the new entity.
Standard of Value
The standard of value is the set of rules or criteria used to determine the worth of something, like an asset or a business. It establishes the basis for measuring and comparing the value. Different standards of value, such as fair market value or investment value, are used depending on the purpose and context of the valuation. The standard of value ensures that valuations are done consistently and objectively, providing reliable information for decision-making and understanding the financial implications of transactions.
Statutory Control
Statutory control refers to the power and authority exerted by government bodies through laws and regulations to oversee and regulate certain activities, organizations, or sectors.
Step Acquisition
Step acquisition, also known as a step-up acquisition, occurs when an entity gradually acquires a controlling interest in another company through multiple purchases over time. Each purchase increases the acquiring company's ownership stake until it eventually gains control.
Stock Deal
A stock deal, in finance, refers to a transaction in which one company acquires another by exchanging its own stock for the stock of the target company.
Sustaining Capital Reinvestment
Sustaining capital reinvestment means setting aside money to maintain and replace existing assets. It involves spending on repairs, maintenance, and upgrades to keep things in good working condition. The goal is to prevent assets from deteriorating or becoming outdated, ensuring their continued value and usefulness. Examples include fixing or replacing equipment, renovating facilities, and updating technology. By investing in sustaining capital reinvestment, organizations can avoid problems, save money in the long run, and keep their assets in good shape.
Synthetic Lease
A synthetic lease is a financing arrangement that allows a company to lease an asset, such as real estate or equipment, while enjoying the tax benefits of ownership.
Systematic Risk
Systematic risk refers to the risk that affects the entire market or economy, rather than being specific to a particular investment. It is caused by factors that affect the overall economy, such as economic conditions, interest rates, or political events. This type of risk cannot be eliminated through diversification because it affects all investments. Investors have to consider systematic risk when making investment decisions and may demand higher returns for taking on this risk.
Tangible Assets
Tangible assets are physical things that have value. They can be touched, seen, and have a physical form. Examples include buildings, land, vehicles, equipment, inventory, and cash. These assets are different from intangible assets like patents or trademarks, which don't have a physical presence. Tangible assets are important for businesses and can be bought, sold, or used as collateral for loans. Their value can change over time due to factors like wear and tear, market demand, or technological advancements.
Tax Attributes
Tax attributes refer to various financial characteristics or elements of a taxpayer that can affect their tax liability. These attributes can include items such as net operating losses, tax credits, basis in property, earnings and profits, and capital loss carryovers. Tax attributes can be used to reduce taxable income, offset taxes owed, or carry forward deductions to future tax years.
Tax Basis
Tax basis, is the value used to determine gain or loss for tax purposes when an asset is sold or disposed of. It is typically the original cost of the asset, adjusted for various factors such as improvements, depreciation, and other capital expenses.
Tax Deductibility of Goodwill
Tax deductibility of goodwill refers to the ability to write off the cost of goodwill as an expense for tax purposes over a period of time.
Tax Structure
Tax structure refers to the system or framework a government uses to collect taxes from individuals and businesses. It includes the types of taxes imposed, the rates at which they are levied, and the rules and regulations governing their collection.
Taxable Asset Deal
A taxable asset deal is a transaction where a buyer purchases specific assets of a company rather than its stock, and the sale is subject to taxation.
Tax-free Asset Deal
A tax-free asset deal is a transaction in which the purchase and sale of a company’s assets are structured in a way that the transaction qualifies for tax deferral under certain conditions set by tax authorities.
Terminal Value
Terminal value refers to the estimated value of an investment or business at the end of a specific period. It represents the value that continues beyond the projected period. Terminal value is calculated using methods that forecast future cash flows or earnings and apply a valuation multiple or growth rate. It helps investors and analysts understand the long-term value of an investment. However, it's important to remember that terminal value is an estimate and involves assumptions and uncertainties.
Tertiary Buyout
A tertiary buyout, also known as a third-stage buyout, refers to a transaction where a private equity firm acquires a company that has already been through two previous buyouts.
The Internal Revenue Service (IRS)
The Internal Revenue Service (IRS) is the U.S. government agency responsible for collecting taxes and enforcing tax laws.
Transaction Method
The transaction method is a way to determine the value of a company or business by looking at similar transactions that have taken place in the market. Valuation professionals analyze recent sales or purchases of similar businesses and compare their financial and operational characteristics. By studying these comparable transactions, they can estimate the value of the subject company based on the prices paid for similar businesses. This method is useful when there are enough comparable transactions and when the market is active and transparent. However, it has limitations, and other factors should be considered in the valuation process.
Unlevered Beta
Unlevered beta is a measure of the risk associated with a business's operations, independent of its financial structure. It removes the influence of debt and focuses solely on the risk related to the business itself. It helps investors understand how the business's returns may move in relation to the overall market. Unlevered beta is useful for comparing the risk levels of different companies or investments on an equal footing, without the impact of debt. It is commonly used in financial analysis and valuation to assess the risk and potential return of an investment.
Unsystematic Risk
Unsystematic risk refers to the risks that are specific to a particular investment or company. These risks are not related to the overall market conditions but are instead influenced by factors unique to that investment or company, such as industry-specific events or company-specific issues. Unsystematic risk can be reduced by diversifying investments across different assets or industries. By spreading investments, investors can minimize the impact of negative events that may affect a single investment. The goal is to focus on the risks that are related to broader market factors, known as systematic risk, rather than the risks specific to individual investments.
Valuation
Valuation is the process of determining the financial value or worth of something. It involves assessing various factors such as financial data, market conditions, and future expectations. Valuation is used to understand the value of assets, investments, or companies. It helps in making informed decisions, such as buying or selling, based on the estimated value.
Valuation Approach
Valuation approach refers to the method used to determine the value of something. There are three common approaches: Market Approach: It compares the item being valued to similar items that have recently been bought or sold in the market. Income Approach: It estimates the value based on the item's potential to generate future income, considering factors like projected cash flows and discount rates. Asset Approach: It calculates the value based on the item's underlying assets, such as property, equipment, and liabilities. The chosen approach depends on factors like the type of item being valued and the purpose of the valuation. Sometimes a combination of approaches is used for a more accurate valuation.
Valuation Date
Valuation date is the specific date on which the value of something is determined. It's the date at which the assessment is made to determine the financial worth of an asset, investment, or business. The valuation date is important because the value of things can change over time, so it ensures that the valuation is based on the most current information available.
Valuation Method
Valuation method refers to the approach used to determine the value of something. There are different methods available, such as the market approach, income approach, and asset approach. The market approach compares the item being valued to similar items that have been recently bought or sold in the market. The income approach estimates the value based on the item's potential to generate future income, considering factors like projected earnings. The asset approach calculates the value based on the item's underlying assets, such as property and equipment. The choice of valuation method depends on the type of item being valued and the purpose of the valuation. Different methods may be used together to get a more accurate valuation.
Valuation Procedure
Valuation procedure is the step-by-step process used to determine the value of an asset or business. It involves gathering information, selecting the appropriate valuation method, analyzing data, applying valuation models, assessing risk, determining the final value, and documenting the process. The goal is to arrive at a fair and reliable value based on the specific characteristics and circumstances of the asset or business being valued.
Valuation Ratio
Valuation ratio is a simple way to assess the value of an investment or company. It compares important financial numbers to give an idea of how valuable an asset is. Some common valuation ratios include the price-to-earnings ratio (P/E), price-to-sales ratio (P/S), price-to-book ratio (P/B), enterprise value-to-EBITDA ratio (EV/EBITDA), and dividend yield. These ratios help investors and analysts make informed decisions by comparing the financial numbers of different investments or companies. However, it's important to consider other factors and do a thorough analysis before making investment decisions based solely on these ratios.
Value to the Owner
Value to the owner refers to the personal worth or importance that an asset holds for its current owner. It takes into account subjective factors like emotional attachment, strategic fit, and unique benefits for the owner. This value may differ from the objective market value, which is based on financial analysis and market conditions. Value to the owner is considered when making decisions about holding, selling, or acquiring assets.
Voting Control
Voting control means having the power to make important decisions by owning a majority of the voting rights in a company. When you have voting control, you can influence and determine outcomes in meetings or elections. It allows you to shape the direction and policies of the organization and have a significant say in decision-making.
Weighted Average Cost of Capital (WACC)
The Weighted Average Cost of Capital (WACC) is the average cost of the money a company uses to finance its operations. It considers the cost of both debt and equity financing. It is a measure of how much return the company needs to provide to its investors in order to compensate for the risk they are taking by investing in the company. The WACC is used to evaluate the attractiveness of investment opportunities and to determine the minimum rate of return required for a project to be considered worthwhile.
With No Transfer Consideration
The term "with no transfer consideration" refers to a situation in a business transaction or reorganization where no monetary payment or other compensation is exchanged between the parties involved.
Working Capital
Working capital is a financial metric that represents the difference between a company's current assets and current liabilities.
Why Appoint Valtech as Valuation Adviser?
Valtech’s team has provided valuation advice to over 200 listed companies in Hong Kong, China, Singapore, Taiwan, Australia, the United Kingdom, the United States and Germany.
Valtech Valuation is a professional valuation firm accredited with ISO-9001 in valuation advisory services. The financial market and valuation requirements are highly dynamic. We are determined to develop and maintain a quality management system to foster an environment which is sustainable and evolving continuously. Our founders stress on development of a system and an environment that our consultants are provided with necessary support and opportunities to thrive.
We are a team of professionals from multiple disciplines including audit, financial modelling, tax, internal control and surveying. Our management adheres professional excellence. Abundant resources are reserved to develop standardized policies and procedures for quality control. We have solid track record in valuation advisory for listed companies, private equity, fund managers and financial institutions. We work closely with big four and other international accounting firms, corporate financial advisors, fund managers and legal advisors.
Valtech Advantages:
Advanced Valuation Techniques: Valtech Valuation can develop and implement advanced valuation techniques that are specifically tailored to the needs of clients. These techniques can go beyond traditional valuation methods and incorporate factors such as market trends, industry benchmarks, and risk analysis to provide more accurate and insightful valuations.
Customized Valuation Models: Valtech Valuation can create customized valuation models that align with the unique investment strategies and asset classes. By understanding the specific requirements and objectives of these entities, Valtech Valuation can develop models that capture the nuances of their portfolios, resulting in more precise and relevant valuations.
Data-driven Insights: Valtech Valuation can leverage its access to comprehensive data sources and analytics tools to provide data-driven insights. By analyzing market data, economic indicators, and performance metrics, Valtech Valuation can offer valuable insights into the valuation of assets, identify emerging trends, and help inform investment decision-making.
Adherence to Compliance and Reporting Standards: Valtech Valuation can ensure that valuation practices adhere to regulatory compliance and reporting standards. By staying updated on relevant regulations, such as accounting standards and industry guidelines, Valtech Valuation can help clients meet their reporting obligations accurately and in a timely manner.