Published on September 28, 2023   7 min
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Hello, my name is Rudy Aernoudt. I'm a professor at the University of Ghent which is a university in Belgium. I'm going to give a lecture today, financial management and the topic is about valuation.
Why do you need to know the value of a company? Well, you have a lot of people who are interested. First of all, if you want to take over a company, you have to know what is the price. It's both important for the selling and for the buying party. If you want to achieve venture capital, I need to find a venture capitalist to get into your company, you have to get a value of the company. If you are a financial manager or a CFO, the objective of financial management is to increase the value of the company but even in the case of liquidation, the creator needs to know the value of the company and finally, as a bank, as a company is often the basis of collateral, you have to know what is the value of my company.
When we speak about the value of a company, you make a distinction between companies who has what we call an organic growth, meaning a gradual growth, often asset based, where in the first years you might make some losses, but you don't have a cash drain, so it's a normal organic growing of the company.
As you can see, we compare a company with a cow because the value of a cow you can say, what is the number of kilograms of meat times price of the meat or you can say, how many litres of milk does the cow give.
Coming back to enterprises, the first method, let's say the meat, is what we call the Adjusted Net Assets calculation. What you do, you look at the assets of the company, fixed assets, floating assets. You look what is the real value, not the accounting value, but you're going to compare with reality. For instance, you see an amount of stocks, you're going to look to the inventory, what is the real value of the stocks. You're going to do some corrections, based on those corrections, then you will say, what is the real value of my assets and you're going to deduct the callable debts. This is the first approach, what we call adjusted assets, which is in fact based on the balance sheet. The second method, going back to