Business Valuation Analysis Essay Example

The business valuation is performing in corporate finance via a general process to determine the economic worth of a business entity. Business valuation is primarily performed when a company is opting to sell all or part of it operations, merging or acquiring another company.   It is imperative for the senior management to use the valuation of a business to diligently determine the current worth of their company by using objective measures while evaluating all facets of the business. In addition, business valuation includes but not limited to analysis of the company management performance, its capital structure, potential future earnings and the assets market value. In fact, the business valuation involves estimating the fair value of a business which is both an art and a science and there are many formal valuation methods that can be utilized depending on the business entity. (Hayes, 2021)

Moreover, the business valuation analysis can be perform using methods like  market Capitalization (Market Cap), Times Revenue Method, Earning Multiplier, Discounted Cash Flow (DCF); Book Value and Liquidation Value etc. These various methods of business valuation can be categorize into (1) income approach which based value of a business on expected income generation, (2) asset approach take into consideration the value of the business assets to determine it value, and (3) market approach uses the business past share or sales of similar business to determine value (Downs, 2019). 

For the purpose of this paper I decided to use Earning Multiplier to get more accurate information of the real value of a business because the business profits are more reliable to show it financial success than its sales revenue (Hayes, 2021).

Earning Multiplier

“The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS)” (Fernando, 2021). Business analyst and investors uses this ratio to determine relative value of a business shares by simply dividing the current stock price by the earning per share (EPS) as expressed below:

P/E Ratio = market value per share / Earnings per share    (Fernando, 2021).

In addition, the P/E ratio aids to determine the premium investors are ready to offer for share of common stock relative to the business earnings. Heisinger, K., & Hoyle, J. B. (2012). 

It is paramount for business owner to understand the value of their business presently or today as well as what supports and drives that value. Having a sound knowledge of all contributing factors to business valuation will help senior management to make informed business decisions like taxation, acquisition, selling; merger and charitable contribution. Businesses should undertake valuation at regular time interval for reality check against biased or uninformed viewpoint by the business owner(s) Elder, J., & Boyce, E.C. (n.d.).