Enterprise Value (EV) is a key performance indicator used by most business owners. Many business managers think that it is the number one factor when it comes to setting their corporate goals and objectives. However, they tend to overlook the importance of enterprise value measurement and, as a result, do not properly align their business with its future possibilities. As a result, the goals and objectives of their business become obsolete and unhelpful to the organization.
The concept of enterprise value measurement is extremely important for managers to properly align the short-term and long-term goals and objectives of their business with each other. Without an accurate knowledge of the enterprise value, managers will fail in determining whether the business is on the right track. It is also necessary for them to set clear goals and objectives in the first place so that they can make effective use of the various business management tools such as the business case analysis or business development model. Without these business tools, it will be very difficult for them to come up with a concrete set of activities and procedures to address issues and concerns in their businesses. In this article, we shall discuss how enterprise value determination is carried out.
First of all, we have to note that the meaning of enterprise value has different meanings to different individuals and enterprises. Generally, it refers to the monetary value of a business, regardless of its size and market position at the moment. It is based on the market value of the total assets and net worth of a company divided by its current market value.
To determine enterprise value, managers take into account several factors. One of the factors that they typically consider is the price elasticity of the business. They consider how changes in the prices of their assets and liabilities affect the value of the firm. The second most important factor that is taken into consideration is the diversification of the business. This means that the firm has various forms of exposures and uses different types of assets in order to meet the challenges that it faces in the operation of its business.
The third factor that is usually considered by managers when carrying out enterprise value determination is the profit margin. This refers to the difference between total assets as determined by the income model and the net worth or value of the firm as estimated by the income model. The firm’s credit rating is also another factor that is taken into account in the process of enterprise value determination. The significance of these factors will be discussed later on.
Basically, there are two types of enterprise value determination: cost-pricing and value pricing. Cost-pricing is the more traditional form of enterprise value measurement. Under this method, the price of an enterprise’s goods or services is used as a basis for valuing the firm. On the other hand, value pricing uses the level of demand, which is called the level of comparative risk. These two methods have different ways of estimating the valuation of the firm, thus resulting to a disparity between the prices set by the two models.
In most cases, most managers prefer the first option. However, there are managers who believe that using enterprise value analysis tools like historical data, market and financial information, and other tools are helpful in the determination of true enterprise value. It should be noted, though, that the main reason why these methods are preferred is because they rely on factual information, which is difficult to obtain. This fact makes the use of historical data more accurate in the long run than current price information. This can also be used in determining the price of the firm.
Enterprise value is an important concept in any business organization. The importance of value analysis can never be undermined or ignored, especially in a business environment where profits and losses are always present. By conducting an enterprise value analysis, managers can determine the exact value of their firm and can set the appropriate price for its products and services.