To know the true value of an asset, you will have to check its components. Similarly, when considering asset valuation, you need to check many different components to finally derive the result. The concept of valuation is widespread and has a lot of scope. Moreover, it also serves a lot of different roles in many contexts. So, before you start the process of valuation for your specific purpose, you need to be aware of its inclusion and choose the most suitable method on that basis. Besides, there are many different types of inclusions in valuation.
Through this blog, we will deal with the different types of valuation inclusions. This, in turn, will help you in deriving a detailed account of your assets or finances. Besides, the inclusions will also make the results more accurate than ever.
The Different Inclusions in Asset Valuation Process
Asset valuation is a type of business valuation. In this process, the business owners use one or more methods to know the worth of any specific asset or a group of assets. Besides, the entire process involves a ton of different factors that will help you in the derivation of the true worth of your asset. Here, “Asset” means both, tangible as well as intangible properties. An asset is something useful and valuable. Still, to know its true worth, you will have to consider a lot of varying internal and external factors. To put it simply, it acts like a Rubik’s cube, where relying on different elements will give you the result you want. You will have to consider all the factors of the puzzle to get the perfect result you want.
Components considered when determining Asset Value
|Role it plays
|Annual Financial Statements
|Shows the current monetary position through balance sheets, cash flows, etc.
|Helps in deciphering the market trends, and current position.
|Comparing your transactions to other similar transactions in the market.
|Determining the future position of cash flow
|Asset Depreciation Mode
|Figures out the exact depreciation of an asset over the years.
|Assessing the potential risks in the near future.
Factors included in comprehensive valuation
Various components of an asset make it valuable. So, as an entrepreneur or any other stakeholder, you need to know what makes the asset’s value. Hence, you need to know the components that are included in valuation. We are making it easier for you to make well-informed decisions by giving you a list of the factors included in a comprehensive valuation of the assets. Besides, a comprehensive valuation will not only focus on the financial aspect of an asset, but it will include all the factors that contribute to the existence of that asset. Let’s see the list of these factors in detail:
The financial metrics include growth in profit, cash flow projections, and more. Assessing these metrics is a fundamental aspect of comprehensive valuation. Moreover, these metrics will help in establishing the base to figure out the asset’s previous, current and future performance as far as finances are concerned.
A comprehensive valuation will not only include the metrics of tangible assets like property and machinery. Ideally, it must also include intangible assets. Trademarks, copyrights, GIs, Patent grants, and trade secrets form an integral part of your goodwill. Since these assets do not have a physical presence, many times you may tend to forget to include this in your valuation. But, doing so is not ideal. Intangible assets often hold much value and may lead to significant changes in your results.
Compliance with Laws
Another important factor included in comprehensive valuation is ensuring that you are working and functioning by the laws. There are many regulatory compliance requirements for all types of financial transactions for a company. If you act against these laws and regulations, there are high chance that you will have to face the consequences for the same. Hence, you must consider this factor before moving on with the comprehensive valuation.
Impact on the Environment
Today, we all know the importance of sustainability. As a result, companies also invest in assets after keeping Corporate Social Responsibility in mind. Hence, when you are trying to value an asset, it will be beneficial to assess that asset’s overall environmental impact over the years of its existence. This factor is gaining a lot of popularity with increasing awareness.
Client retention is a big part of a company’s growth and success. So, how you maintain your relations with the clients, how they keep on coming back to you, and the trends of their behaviour are also key components included in asset valuation.
From these points, it is clear that valuation is the process of combining all the inclusions to serve you to the best possible extent. The different types of elements are mixed to create the perfect symphony for your needs. Hence, it is safe to state that without the different types of valuation inclusions, the asset valuation you get will not be completely accurate.
Common inclusions in financial valuation
Now that we have had a detailed look at the inclusions for asset valuation, let’s move on to understanding the common inclusions in financial valuation. Financial valuation usually refers to the process of determining the value of any type of monetary investment. It helps the investor in making a fair and well-informed decision. However, before you continue the process of valuation, it is vital to understand the common factors that form the concept of financial valuation. Let us read about these inclusions in detail.
|Role it Plays
|Helps in projecting the predictions for inflow and outflow of cash
|Rate of Discount
|Determines financial value through DCF method
|Assessing the stability in future growth rate of business
|Analysing the various uncertainties for the near future
|Gives an idea of the position of similar entities
|Displays the value of the asset and liabilities from the financial statements
|Analysing the conditions of the overall market and global economy.
Financial valuation gives the economic value of any asset, financial security or business after considering a lot of different elements. A detailed understanding of valuation with comprehensive inclusions will also require you to have an understanding of the following factors of valuation:
Discounted Cash Flow (DCF)
The DCF method for valuation is very common. Here, you can know the present value of an asset by calculating the future income it will bring and then discounting that cash flow at a pre-decided rate. The discount rate can be decided based on the asset, and its depreciation over the years.
Comparable Company Analysis (CCA)
This is also a method of comprehensive valuation where you compare the growth and position of your company to other similar existing companies. This method includes a lot of external factors to achieve accurate valuation. These external factors include market research, access to company data, and more.
The most common valuation method that investors in securities and stocks use is this. It determines the asset value by multiplying the income or profit earning you receive on it. It is a simple and fast-paced method. Hence, individuals usually rely on this method for making their small-scale investments.
Net Asset Value (NAV)
When you calculate the value of an asset after removing or deducting its liabilities per unit it is the Net Asset Value. It is similar to the balance sheet value or the book value of an asset. Taking this value of assets as it is, is usually a safe bet for business owners.
Consideration of Liquidation
Liquidation happens when you are closing your company. In this scenario, you will also have to liquidate all your assets. This process means that you will have to give the money worth those assets to its stakeholders. For this, valuation is a key factor. Moreover, this is also very helpful in selling any asset quickly.
To conclude, deriving the exact value of an asset or a financial instrument is as difficult as solving a Rubik’s cube. You have to consider a lot of factors that are integral to the asset or instrument. Moreover, it is also quite evident that these factors may either be internal or external. No matter the existence of these factors, all of them equally lead to creating the valuation for a specific asset. With so many complexities at hand, business owners need to keep their purpose of valuation clear and choose the method of valuation after considering all the different types of valuation inclusions.
What are the elements of valuation?
The different types of elements of valuation are based on the type of your business. The most common elements are assets, financial instruments, power of income generation, and the position of the market.
What are the important components of valuation?
The most important components of valuation are fair value, book value, market conditions, historical data, market comparison, and cash flow.
What is the intrinsic value component in valuation?
The intrinsic value is the basic value of any security like a stock. This value can be calculated based on the asset’s income generation power and its quality.
What is the replacement value factor in valuation?
As the name suggests, it refers to the cost of purchasing an exactly same but newer product and then deducting the original asset’s purchase cost from it.
What is salvage value in valuation?
The money that you can get upon the sale or distribution of a particular asset is its salvage value. The salvage value is a big deal in merger and acquisition transactions. More specifically speaking, in acquisition transactions for the value of the company being acquired.
Are financial statements an important component of valuation?
Yes, financial statements like the reports and the balance sheet are an integral aspect of the business valuation. These financial statements display the actual financial position of the company by including its varied assets and liabilities therein.
What is an insurable value?
The value of a part of an asset which is destructible and needs to be insured is the insurable value of that asset.