Value of a company

[jman3232]

How do you determine the value of a company? What kind of research do you put in. Where is the best place to go to learn: any specific books or websites?

I have looked through the reading list and I'm not quite sure which book would help me learn this. Most of the books just look like they tell you how to create a diverse portfolio.

[elus2]

Check the section on value investing in the reading list sticky

The resource i used the most was:
damodaran

[elus2]

Seems like it's no longer up there. I'd focus on learning how to read financial statements via a college level financial accounting course and then move onto books like Intelligent Investor. Read up on articles on Warren Buffett and his annual letters to shareholders featured on the berkshire hathaway website.

This article by Richard Russell may also be of some interest to you:
the perfect business

[Evan]

Damodaran's stuff is all still there, but his pages have always had a static url when I've used them. You can find everything through http://damodaran.com

[elus2]

[ QUOTE ]
Damodaran's stuff is all still there, but his pages have always had a static url when I've used them. You can find everything through http://damodaran.com

[/ QUOTE ]

I was referring to the reading list sticky [img]/images/graemlins/smile.gif[/img]

[jman3232]

alright that seems like a good start. thanks!

[mikeczyz]

valuing a company takes alot of work.

for my investment analysis class, our term paper was to do a company analysis. 15 hours later, we ended up with what i considered to be a VERY shallow, basic valuation of intel.

i don't understand how regular people have the time to research stocks/companies and create informed buy/sell opinions. after the term paper, i still don't feel comfortable giving out an opinion on intel. however, our conclusion was that intel is underpriced.

[prohornblower]

Good question, I've been wondering about this as well.

I'd assumed that a very basic way would be to look at the annual profits. If a company has consistently made 10 million in profits per year, a silent investor could throw 100 million to buy the company and "guarantee" a 10% return on investment.

Of course many people that buy a company will put sweat equity into it, and they are also taking liability (unlike buying funds), so I'm guessing you'd want more like a 20-25% annual return-on-investment??? So maybe the company could only sell for 50 million???

This is obviously very very basic and simple, and I'm leaving a lot of factors out, but I think it's a start.

[Grasshopp3r]

There is no single source for learning busines valuation. There are three general principles: 1) asset values; 2) income values and 3) comparable sales. There are many techniques to apply these approaches. The short answer is that a business is worth what someone would pay for it, assuming that the purchaser is prudent and wants to profit, as well.

I have been in the commercial real estate appraisal business for about 16 years. Generally speaking, public companies are the most fairly valued as they are traded daily on an efficient market.

[Evan]

[ QUOTE ]
Good question, I've been wondering about this as well.

I'd assumed that a very basic way would be to look at the annual profits. If a company has consistently made 10 million in profits per year, a silent investor could throw 100 million to buy the company and "guarantee" a 10% return on investment.

Of course many people that buy a company will put sweat equity into it, and they are also taking liability (unlike buying funds), so I'm guessing you'd want more like a 20-25% annual return-on-investment??? So maybe the company could only sell for 50 million???

This is obviously very very basic and simple, and I'm leaving a lot of factors out, but I think it's a start.

[/ QUOTE ]
This is kind of close. Two things:

1) Use cash, not GAAP earnings
2) You can argue until you're blue in the face and it's unlikely two people will agree on a required rate of return, that being said 20% is extremely high and the particular number will depend on the particular asset you're valuing.