How would you value a nationalised company with only limited information?

Question

I'm studying for an accountancy qualification and am struggling with how you would value a government run company.

Any suggestions please

Answer 1

I don't think that Accountancy bodies are interested in hypothetical unmeasurables, like value to the community. Therefore :-

If the Government had to sell off this entity, it would have to find a way of valuing it. Shareholders would be interested in its potential. I am assuming that you are talking about a nationalised entity, and not a limited company.

Currently, however, if it doesn't make a surplus on trading, you could argue that it isn't worth anything, save the open market value of its assets less debts.

If you could determine the value of capital employed, determine a fair rate of return on this by comparing with similar industries, taking risk into account. You would then compare this 'fair market return' with the actual return. If the actual return is greater than the 'fair return', the company would be valued proportionately higher than the actual capital employed.

It is likely that the actual trading surplus could be adjusted to take account of any efficiency savings that could be made. Most Nationalised Industries are grossly inefficient. One only has to study the huge savings that were made following the payroll reductions that were made during the privatisations in the early nineties.

Answer 2

First you have to decide what worth means.  Does it mean something basically accountancy, e.g. ROCE, or does it mean the value it provides to the community.  In other words you need to decide from what perspective to carry out your evaluation, there may be several, some that you had not thought of before..

Then you need to tabulate what information you have, what you can add to this, by asking around, local and national press, using the company's services.

Then you need to evaluate the information from the perspectives you decided at the beginning, changing them, if necessary.

Once you have made a reasonable fist of it, see if you can discuss it with someone in the Company, aim high.  If you have done well enough to catch their interest, they will give you some pointers, they may even hire you.

Basically, the message is use what you know to find out what you do not know.