Market Valuation Methods for Company's Equity

Market Valuation Methods

Market equity valuation of Ethiopian companies is assuming importance in financial/ investment circles involved in trading or transactions in equity shares. These valuations serve a number of objectives that are itemized under (A). Section (B) provides an outline and addresses the derivation of equity valuation.

A.Objectives

  1. Presently, investors, both local and foreign, are showing increasing levels of interest in acquisition of equity shares of local companies. Likewise, Ethiopian companies (investees) are also keen on accessing equity capital both local and foreign. A key objective of developing and providing a credible equity valuation system is therefore to enable facilitation for equity trading.
  2. A credible equity valuation methodology may also greatly assist in relaxation of terms under which loans are provided by banks which at present invariably insist on excess property collaterals. Credible valuation of equity would enable banks to examine the debt capacity of companies and thereby ensure secure lending.
  3. It follows from the above that the aim of developing credible valuation for equity is to enhance trade in both equity and debt that would lead to provision of access to capital and banking markets.

B.Derivation of equity valuation

  1. Macro-economic factors inclusive of government policies, plans and budgets
  2. Sector factors (risk and return profile of sectors) would more closely determine the performance as well as the equity values of the respective companies in the sector.
  3. Financial and business information/performances relating to specific companies that determine in the final analysis, the value of its equity.
Macro-economic factors
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Sector factors (Risk and return profile of sectors)
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Specific company financial and business information

Directed closely by the above, the additional data and information produced at this stage will be company specific and would focus on evolving the equity value of the company which would be derived from the financial and business performances that are obtained from company documents and discussions with the management. In principle value should be based on the ability to produce benefits and/or security. Broadly speaking, the procedures that are adopted to arrive at the estimated market value of the equity include the following: -

A.Focus on value indicators to be adopted for the equity valuation scheme in (B)

  1. Absolute profits and trends
  2. Profits relative to employed resources and trends
  3. Foreign currency generated relative to total sales and trends (Potential to operate in other markets)
  4. Competitiveness (Cost advantages, market share etc.) domestic and international
  5. Production capacity relative to specific demand for the company’s product (Local and international)
  6. Replacement value of fixed assets
  7. Potential performance of the company (Strategic value) i.e. present value further discounted by management capacity./li>
  8. Liquidity (Operational liquidity)

B.Establish equity value measures (to be weighted for specific application)

  1. Risk and return related capitalization items:
    • Capitalization of return
    • Capitalization of foreign exchange denominated returns
    • Capitalization of excess operational Capacity
    • Capitalization of debt capacity
    • Capitalization of growth rate relative to market
    • Capitalization of operational liquidity
  2. Net replacement value of assets
  3. Net present value of future performances adjusted for management risk

NOTE:

The valuation exercise requires identification of value features that are of importance and specific to any given company. These will guide the weighting scheme to be adopted.

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