Intrinsic value: Calculating the value of a company

The intrinsic value method is the simplest valuation method. It serves as the basis of the indirect goodwill valuation method, to which capitalized earnings for the last two financial years are added. 

The simplest method is the method that measures intrinsic value: the value of the company is determined by two items on the balance sheet, floating assets and fixed assets (taking into account latent reserves) after deduction of the latent tax liability. In other words, the value of the company is calculated without taking into account future revenues, employee know-how or relations with customers or suppliers. This method then is not very suitable for very profitable companies, which will see their value underestimated.

What is known as the indirect goodwill valuation method is closer to reality. This is the method used by the tax administration to calculate the market value of unlisted companies. It is based on capitalized earnings for the last two financial years, combined with the intrinsic value of the company and is usually calculated as follows:

    2 x capitalized earnings plus intrinsic value
Market value = --------------------------------------------------------------------
    3


Last modification 03.05.2021

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