Asset-Based Approach

  

The best way to find out what something is worth? Sell it. Short of that, analysts have to make educated guesses.
When trying to figure out the value of a company, several ways to calculate these estimates exist. The asset-based approach represents one common way.
The math involved can get complicated, but the concept is fairly simple. To figure out the how much a company is worth, add up the value of the assets owned by the firm.
There are limitations to this approach. Not every company can get boiled down to the sum of its assets. McDonald's is worth more than a bunch of real estate and a pile of hamburger meat. Its brand, its business process and other intangible benefits make it more valuable than the asset-based approach would imply.
For that reason, the asset-based method only makes sense in certain situations, such as holding companies or companies that are failing and headed for liquidation.

Related or Semi-related Video

Finance: What Does a Financial Analyst D...320 Views

00:00

what does a financial analyst do? well this and this and this.

00:10

so after all that analyzing of financial data what does the analyst actually do?

00:15

well she makes recommendations to you know do stuff. generally so that [man frowns at camera]

00:20

investors can make money or not lose money. and to be clear financial analysts

00:25

come in a few different flavors. pick an analyst who works for a stock brokerage

00:28

for example. well they produce reports which the brokerage then gives to

00:32

clients hoping that it will incentivize its clients to trade with the firm and

00:37

give the firm its business, which of course generates commission for the

00:41

stock brokers in theory. the goal here is to make money for the client. but the

00:45

more near-term goal is to you know get the client to pay attention to the firm.

00:49

this is a subtle but very important difference from a financial analyst who [one man stands behind another and shouts]

00:53

works for an investment company ie one who actually invests money for clients

00:58

and is evaluated based on the performance of those investments. a

01:02

financial analyst inside of an investment company like fidelity or

01:06

Franklin or American Funds cares only about how well the investment does. the

01:11

financial analyst does not have to juggle clients or worry about marketing

01:15

to non-professional investors or generating commissions for the firm. all

01:20

they have to worry about is beating the market or their index or whatever

01:23

benchmarks are set out there for them .in addition there are two flavors of [woman hits punching bag]

01:26

financial analysts on Wall Street more or less .by side -those are extensions of

01:31

hedge funds and private equity funds and venture capital funds and mutual funds-

01:35

they're all the people who analyze things from the perspective of a buyer

01:39

only like they buy the stuff they don't have to keep clients happy and get

01:43

Commission business. then you have the sell side which are largely just [graph showing stocks]

01:47

extensions of stockbrokers. stockbrokers hire the analyst to give smart opinions

01:52

on buying selling and holding stocks such that well they can go talk to their

01:56

clients about it and win Commission business from getting them to trade

01:59

through them by recommending Microsoft at forty two dollars and twelve cents

02:03

and stuff like that. there are financial analysts who work for the government as

02:07

well. these guys are usually housed in hell-like divisions of the government

02:11

called the Fed which assesses whether or not the [man in dark glasses behind computer]

02:14

economy is heating up cooling down or see-sawing like a spring day in Chicago.

02:17

well here a financial analyst might be sampling the prices of a half gallon

02:21

carton of GMO milk at 500 grocery stores around the country. they then use that

02:26

data to figure out if the country is feeling inflation deflation or just

02:30

boredom .financial analysts exist inside of corporations as well.

02:34

corporate analysts perform market evaluations to try to help companies [man smiles at camera]

02:38

sell more product for more profit which in turn fuels the company's growth and

02:42

all that other fun stuff. so yes being a financial analyst might not be the

02:46

flashiest job in the world but just think about all that Ben and Jerry's you

02:50

can buy once your commission comes through. [people cheer the ice cream truck]

Up Next

Finance: What is Net Asset Value (NAV)?
5 Views

NAV isn't a cool new navigation app...it's how mutual fund shares are valued or priced at the end of each trading day.

Finance: What is a Holding Company?
6 Views

What is a Holding Company? A holding company is a company that controls enough voting stake in another company to have control over operations. Usu...

Finance: What is a Sell Side Analyst?
1 Views

What is a sell side analyst? Hit play to find out.

Find other enlightening terms in Shmoop Finance Genius Bar(f)