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Business Valuation Formula
Business valuation formula are a way of measuring the value of one business against other like businesses by comparing the relationship between price and profit.
The most common business valuation formula is the price / earnings ratio. In public companies the business valuation formula is the comparison of after tax earnings divided into the market capitalisation of the public company.
For example, if the net profit after tax of the National Bank of Australia is $3 billion and the total market capitalisation of the NAB is $45billion....(based on 200 million shares priced by the market at $27.50per share) .....then the price earnings ratio is 15 times earnings....that is 45 divided by 3 equals 15 times earnings.
You can then compare the PE ration of the NAB against the PE ratio of the Commonwealth Bank (which for example may be trading at 17 times earnings).
This business valuation formula allows the buyer to the make a conclusion on which bank is a better buy. Is it the bank which is trading at a lower Price Earnings ratio and appears "cheap'....or is it the bank which is trading at a higher Price Earnings ratio and which may be perceived to be having better prospects in the near future or which may be considered to be being operated slightly more efficiently?
The ROI is another business valuation formula. This is a yield calculation where the profit of a small business is divided by its market value and then expressed as a percentage.
For example, a supermarket may demonstrate a profit of $1 million and a price of $4million. Its ROI or return on funds invested is 25%.
There are various other business valuation formula and to discuss the business valuation formula which is appropriate to the circumstances of the business you are involved in...talk to Graham O'Hehir on support@perthvaluer.com.au or call 1300634588.
