Earning method - bases of valuation, Finance Basics

Earning method - Bases of Valuation

The business is valued according to the net stream of income it is expected to create over its lifetime.

Determination of maintainable earnings

a) The first step in arriving at earning based valuation is for estimate the future maintainable earnings and if the situation during the future is expected to be same to those in the past, it is then prudent to face the forecast on the historical figures.  Conditions do change however and like as changes in revenue and cost.  Hence, a detailed examination of profits of the most current loss and profit account will be essential to estimate the effects of the changes.  Though the information known will depend upon the nature of the business the common principles to bear in mind must comprise the trend of sales and gross profit.

b) Analysis of sales and gross profit percentage along with:

i) Customer type

ii) Geographical areas

iii) Departments

iv) Product lines

c) Costs as a percentage of total sales.

d) Necessity of expenditure in the business e.g. excessive remuneration on expenses charged.

e) Unusual fluctuations in the ratios.

f) Inclusion of all costs.

g) Effects of external situation like recession or inflation.

Though, there is several type of arriving at the value based on the earnings valuation as:

  • Price earnings ratio valuation
  • Earnings yield valuation
  • Super profits valuation
Posted Date: 1/31/2013 1:43:35 AM | Location : United States







Related Discussions:- Earning method - bases of valuation, Assignment Help, Ask Question on Earning method - bases of valuation, Get Answer, Expert's Help, Earning method - bases of valuation Discussions

Write discussion on Earning method - bases of valuation
Your posts are moderated
Related Questions
Liquidity Ratios - Ratio Analysis It also identified as working capital ratios.  They show capability of the firm to meet its short term maturing financial obligation/recent l

1. Using the variance-covariance matrix (∑) and the expected return vector (er) given in the appendix, calculate the set of weights that correspond to the portfolio that maximizes

Partnerships - Types of Business Organisations Defination "The relationship, that exists with persons carrying on a business in common by a view of profit." Formati

Before purchasing insurance we have to go through different factors. Among different important factors there are two most crucial aspects we should consider before buying insurance

Earnings Method or Earning Basis Valuation By using the earning valuation method, a company will employ its P/E ratio to value its shares. P/E    =  MV/E MV    =   E x P

Reasons for Different Interest Rate Interest rates may differ in different market and market segment since: i) Size of the loan: Deposits above specific amounts into the

what is cash budgeting and what is it used for

Given the following Present Value Plot for Projects A and B, which are mutually exclusive projects, answer the following questions: (i) What is the DCFROR for Project A? fo

Question 1: (a) What do you meant by the term ‘Life Insurance Contract'? (b) Many people prefer to choose Single life policies compared to Joint life policies. Why is t