How Do You Calculate the Value of a Company by Shares?

There are many different techniques of business valuation. However, most companies tend to calculate their values by shares because it is a highly reliable and efficient method of calculating a company’s value.

In simple terms, the valuation of shares means evaluating the fair value of the company’s shares.

In this post, we will discuss this concept in detail to determine how the accounting firms in Singapore calculate the value of companies by shares and how a suitable valuation method can be chosen for business valuation.

Fundamentals of Share Valuation

Share valuation uses quantitative techniques to evaluate the value of a company through its shares. The share value depends on market demand and supply; therefore, there can be massive differences in share valuations at different periods.

It is easy to perform share valuation on public companies, but private companies face a lot of challenges when it comes to business valuation by shares.

The primary reason behind such challenges is that the shares of the private companies are not publicly traded, so it is difficult to determine the values of their shares.

graph chart graphic

Significance of Valuation of Shares

There are many situations in which business valuation by shares becomes important. The good thing is that you can contact professional accounting firms in Singapore to get help in this process and perform business valuation efficiently.

Some of the instances in which valuation of shares become essential are:

  • When you are selling your business, you will want to know the value of your company, and valuation by shares is a reliable way to determine business value.
  • If you are approaching a bank or any other lender, you might want to use shares as a security.
  • Valuation of shares is an important part of procedures like mergers, acquisitions, and reconstruction of organizations.
  • Business valuation is also necessary for situations when the company is implementing some new rules and regulations.
  • Tax assessment procedures.

Choosing the Share Valuation Method

There are various methods of share valuation, so it is important to consider the important factors while choosing the best approach to determine the value of your shares and perform a business valuation.

1. Assets Approach

Organizations that invest a lot of money in capital assets or have a very large volume of capital work use this approach as the primary method of business valuation. It involves valuing the shares while a firm is going through a merger, absorption, or liquidation.

Information like the asset base of the company, liabilities, payable and fixed assets must be considered in this process. Businesses that want to use the asset-based approach should rely on professional accounting firms to ensure professional and experienced accountants are handling this process.

analysing business trend

2. Income Approach

Two of the most popular accounting methods are discounted cash flow and price earning capacity. The DCF method is part of the income approach in which the future cash flow is projected to evaluate the fair value and overall reasonability of the collected data.

It can also be used to evaluate historical earnings. It simply means that newer companies cannot use this approach for business valuation.

In the income-based approach of business valuation, the value per share is calculated on the basis of the organization’s profit for distribution. Thus, the profit can be easily calculated by deducting reserves and taxes from the total profit.

For this purpose, the accountants will collect the company’s expected profit details and capitalized value data to calculate the share value.

3. Market Approach

Another common approach is to consider the market value of the shares for business valuation. However, this method is only applicable to those publicly listed companies that have shared their share prices in the open market.

Moreover, if a similar company is listed and operates in the same industry, then the prices of that company’s share can also be used for business valuation.

The good thing about the market-based approach is that data about various companies, including private ones, can be found online from official databases. As a result, it becomes easy to get reliable results of the business valuation.

All In All

There are many different methods of business valuation and determining the value of a business by its shares. This entire process can be facilitated by relying on professional accounting firms in Singapore that perform various types of business valuation and provide comprehensive results to ensure the overall reliability of the results and contribute to business success.

For more information, feel free to get in touch with our professionals.