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
Disadvantages of Debt Finance It is a conditional finance that is it is not invested along with any approval of lender. Debt finance, whether used in excess may interr

ROA - Return on Assets The Average of the industry ROA was 10.02% for 2004, 6.81% for 2005, and 7.32% for 2006. The chart showed that Lenovo had a little bit higher ROA th

what is the ambiguity

Compute the Payback Period - Example Cedes restriction has the following details of two (2) of the future production plans. Just one of these machines will be purchased and su

What are the types of Money and Bank Regulations? Types of Money : a. Commodity money b. A commodity-backed money c. Fiat money Bank Regulations: a. Deposit i

Constraints of Venture Capital in US 1. Require of rich investors in US, thus inadequate equity capital. 2. Inefficiencies of stock market - NSE is investors and inefficien


The Balance Sheet of International Trade Ltd. as on 31/3/2008 is as under:-                                  Liabilities Amount Assets

Volpe Corporation produces class rings to sell to college and high school students. These rings sell for $75 each, and cost $30 each to produce. Volpe Corporation has fixed costs o