3 ways to value a loss-making company
It's now easier to value an unprofitable company.
In 2021, growth stocks went to the moon. Regardless of whether the company was turning a profit, investors bought them up in droves.
2022 came, and it all came crashing down. The stocks that were hit the most were companies which were yet to turn a profit.
We cannot apply traditional valuation methods when valuing a loss-making company. This is why it’s so challenging.
Methods such as discounted cash flow (DCF) analysis rely on projected cash flows and profitability, something which these companies do not have.
That being said, there are some methods that can be used to value such companies.
Here’re 3 approaches you can consider:
1. Asset-Based
This involves valuing a company based on its tangible and intangible assets.
Examples of tangible assets:
Property, plant, and equipment
Examples of intangible assets:
Intellectual property
Customer relationships
Brand value.
Net asset value = Assets less Liabilities
2. Market Comparables
Scan the market for companies in the same industry.
Compare the company to other similar companies in the market that are profitable.
This can involve looking at valuation multiples such as price-to-earnings (P/E) or price-to-sales (P/S) ratios.
Apply these multiples to the loss-making company’s financial metrics to arrive at a valuation.
3. Future Potential
How likely is a company going to be profitable in the future?
Some important factors to consider:
Products or services
Market position
Management team.
You would then use this potential to estimate future cash flows and apply a discount rate to calculate a present value.
Conclusion
It’s no surprise that valuing a loss-making company is highly subjective. There are many assumptions being baked into the numbers.
With these 3 approaches, it’s now much easier to value loss-making companies.