Top Valuation Methods for Unlisted Companies

Valuing unlisted companies presents unique challenges, primarily due to the lack of readily available market prices. Unlike listed stocks, where prices are easily accessible, determining the fair value of unlisted shares often requires a more careful and nuanced approach. Investors may rely on book values or make speculative assumptions, which can create uncertainty in the valuation process. 

Therefore, understanding the right valuation methods is essential for identifying investment opportunities in the unlisted market. In this blog, we will explore the top valuation methods for unlisted companies, equipping you with the insights needed to accurately assess their intrinsic value and make informed investment decisions.

Valuation methods for unlisted shares: 

Unlisted shares are not traded on stock exchanges, meaning they don’t have fixed prices like listed stocks. Instead, they are bought and sold over the counter, which can make their valuation more complicated. Since there isn’t a one-size-fits-all method for valuing these shares, different techniques are used based on the specific circumstances of each company. Below, we’ll explain some common methods for assessing the prices of unlisted shares.

1. Book Value Approach

This valuation approach determines a company's worth by assessing the values of its assets and liabilities as recorded in its financial statements.

Company Valuation= Book Value of Assets - Book Value of Liabilities

It is essential to conduct a fair assessment of assets and liabilities and update them at least once a year. Additionally, an annual revaluation of assets is necessary to capture their fair market value accurately. The only intangible asset permissible in this calculation is goodwill, as it cannot be internally generated by the company.

Applicability: This method is most effective when assets and liabilities are valued in accordance with international accounting standards. Some assets may be recorded at their nominal or historical cost, which might not reflect their current market value.

2. Recent Transaction Price

Unlisted shares often experience infrequent trading, making recent transaction prices useful as reference points. These prices ought to represent fair agreements between independent parties, with no pressure on either side to buy or sell. Ideally, transactions that occurred within the last year should be prioritized for valuation. If transactions are older than a year, it may be necessary to explore alternative methods to ensure accuracy. 

Applicability: This method is useful when recent trade prices are available. However, if such information is lacking due to low trading activity in unlisted shares or is outdated, this approach may not be viable, necessitating the exploration of alternative valuation methods to ensure a precise assessment.

3. Discounted Cash Flow/Price-to-Earnings Ratio

The valuation of unlisted shares can be estimated by projecting future earnings and calculating their present value. Two critical aspects of this method are selecting the appropriate discount rate and forecasting future profits. Typically, a market or industry price-to-earnings ratio serves as the discount rate, and recent earnings data is utilized to project future earnings.

Applicability: This method is applicable when there is extensive earnings information available over a longer period. It should also rely on a broad price-to-earnings ratio rather than one from a small market.

4. Net Asset Valuation (NAV) - Including Goodwill and Identified Intangibles

NAV is determined by subtracting total liabilities at current market value from total assets at current market value. This valuation method encompasses all assets and liabilities, including intangible assets, based on their current market prices. Ideally, valuations should be derived from recent evaluations, preferably within the last year.

(CMV of Assets - CMV of Liabilities) = Company Value

The key distinction between this method and the book value method is that NAV relies on current market values, whereas the book value method is based on historical values. 

Additionally, NAV incorporates identified intangibles.

Applicability: This approach effectively calculates a market value when valuations are accurate and all assets are included in the NAV calculation. However, if valuations are incorrect or assets are omitted from the NAV, this method may yield a misleading market value, making alternative methods more appropriate.

5. Net Assets Valuaton (NAV) Excluding Goodwill and Identified Intangibles

The only difference between this method and the previous one is the exclusion of goodwill and identified intangibles.

Applicability

This method is advantageous when goodwill and intangibles have a minimal effect on the overall valuation. It provides a systematic approach that can be especially beneficial for valuers who encounter difficulties in estimating these types of assets. Given that these assets play a significant role in determining enterprise value, this method may not fully capture the market value of unlisted shares.

Conclusion: 

The most prevalent valuation methods include the Discounted Cash Flow/Price-to-Earnings ratio and the Book Value Method.

Determining the valuation of unlisted shares is crucial for investors, but it poses challenges due to the scarcity of information regarding these shares. That’s where Precize steps in. Our platform offers comprehensive research reports crafted by expert financial analysts, ensuring you have the insights needed to make timely investments. If you're considering investing in unlisted shares and require a research report on any unlisted company for evaluation, visit Precize.in.