Valuation Through Comparable Stock

[Keith]

#2215

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Calculates a price-earnings ratio for a publicly traded security. This ratio is then used to determine a price per share for a closely-held business interest to be valued.

Entering Data

1. Per Share Market Price of a Similar CompanyEnter the per share market price of a publicly held company which is comparable with the closely held business.
2. Earnings Per Share of that Same CompanyEnter the earnings per share of the publicly held company.
3. Earnings Per Share of the Business to be ValuedEnter the earnings per share of the business to be valued.

Results

The calculation results show a price-earnings ratio for a publicly traded security. This ratio is used to calculate a price per share for a closely held business. To calculate this value, the calculation divides the price at which the traded stock is selling by the earnings of the business. It then applies the resulting price-earnings ratio to the earnings per share of the closely held corporation to calculate the market value per share. The equivalent capitalization rate is also shown in the results.

NOTE: finding a perfect match is rarely possible. Even close matches may require adjustments before accurate results can be obtained.

Often, the value of a closely held business can be determined by referencing a comparable company whose stock is listed and actively traded on a securities exchange or on the over-the-counter (OTC) market. This approach is based on the theory that if two companies are more-or-less comparable, and the listed company is selling for five times earnings, then the closely held firm’s stock is also worth five times its earnings.

Finding an appropriate comparable company requires research and careful consideration. Similarities in product lines, size, growth, and profitability are indications of comparable companies. Inspecting balance sheets and income statements is also recommended. Trade magazines are a good place to begin research.

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