What is asset Based Valuation Model

Before a company buy others company they will consider the value of company so investors will consider the value of company too. The investor want the right price for the stock whether it is cheap or expensive. The cheap stock might give the investor high return.

One of the valuation model is asset-based valuation models which aggregating market value of asset an liabilities of the companies. When the company market value is higher than book value, the profitability of company is normal. If, on the other hand, the profitability below normal, the book value is higher than market value.

Why it could occurs? It because the market value of the company could change. We can see the stock market change everyday because of the investor demand. The rumours also can affect the investor demand so the stock price does.

The challenge of the asset based valuation  is fixed asset calculation. The analyst should be able to predict the value of fixed assets. The company may have fixed asset or deprecation calculation. The second difficult is goodwill or royalty. No one know exactly the royalty of mining company, book company, etc so they may need people who understand to asses the asset. I heard a company has goodwill that 10 times higher than fixed assets.

The company which has higher goodwill is a fragile company. The asset can be blown. We must remember dot-com bubble that make the investor loss. It because most the dot-com company is goodwill. Off course, the company cannot sell goodwill as we sell fixed assets.