Экономические науки / 9. Экономика промышленности

Saikenova Zh.T., Ph.D. Sorokina L.I.

D. Serikbayev East Kazakhstan State Technical University,

The Republic of Kazakhstan

The criteria for the comparative approach in evaluating business of functioning enterprise

The theoretical basis of a comparative approach, proving the possibility of its application, as well as the objectivity of the productive value are the following fundamental positions. First, the appraiser will use to guide actual market price formed at similar companies or their stocks. Secondly, the comparative approach based on the principle of alternative investments. Third, the price of the company reflects its operational and financial capacity, market position, development prospects.

The comparative approach has a number of advantages and disadvantages, which should take into account professional appraiser. The main advantage of a comparative approach is that the evaluator focuses on the actual purchase price of similar enterprises. In this case, the price determined by the market, as appraiser is only limited adjustments, ensuring compatibility with value of analogues. The important point is that the calculations are based on retrospective information and, therefore, reflect the actual results achieved by the enterprise production and financial performance, while, for example, the income approach is focused on forecasts of future earnings. Another advantage of the comparative approach is a real reflection of supply and demand in the property investment as the price of the transaction is actually the most integrated considers the situation on the market [1].

The comparative approach has some significant drawbacks that limit its use in valuation practice. Firstly, the basis for the calculation is made in the last financial results. Secondly, a comparative approach is only possible if the most versatile financial information only being evaluated but also on a large number of similar firms selected evaluator as analogues. Thirdly, the evaluator should be able to make complex adjustments to amend the value of the final and intermediate calculations that require serious study (due to the fact that in practice, there is no absolutely the same companies).

In the practice of valuation activity it is known three necessary conditions for the use of the comparative approach [2]:

1 The presence of active financial market.

2 Open market or access to financial information.

3 Availability of special services, collecting price and financial information.

Depending on the purpose, object and specific conditions of the comparative approach involves the use of three basic methods.

1 Method of company-analogue.

2 Method of transactions.

3 Method of industry factors.

Method of company-analogue or the method of capital market is based on the price formed an open stock market.

Method of transactions or sales method is focused on the acquisition price of the company as a whole or of a controlling stake.

Method of industry factors or method of industry relations is based on the recommended ratio between price and certain financial parameters.

The object of evaluation is enterprise “XXX” JSC, East Kazakhstan, The republic of Kazakhstan. The spectrum of activity of the enterprise is wide. The main thing is sinking and reinforcement shafts to 1,000 meters depth of or more, the construction chamber, inclined and horizontal mining, design of underground and above-ground buildings and structures to develop technological projects of deposits development, construction and installation work [4].

As analogue was taken “AAA” LLP, East Kazakhstan, The Republic of Kazakhstan.

“AAA” LLP is a modern mine construction company. The company's activity is construction of underground and surface facilities of ore deposits, covering the whole spectrum of capital mining, exploration, mine development, installation and electrical repair works. In addition, “AAA” LLP produces a wide range of wood products, different brands of concrete and mortar. “AAA” LLP has divisions in Ridder and Zyryanovsk, Kazakhstan [4].

The cost of equity capital of “AAA” LLP at the end of 2014 amounted to 1017575 thousand KZT.

Data which are taken from the report on profits and losses of analogue and the target firm are presented in Table 1 [5].

Table 1

Initial data for the calculation the cost of the company using comparative approach

Indicators, thousand KZT	“AAA” LLP	“XXX” JSC
1 Revenue	1 316 440,29	1 421 451
2 Cost value, including depreciation	614 748, 68 73 392,46	926 499 88 380,6
3 Commercial and administrative costs	208 258	243 641
4 Payment of interests (for long-term loans)	364,34	961

The method of the capital market is one of the methods of comparative approach. Comparative approach is a combination of methods to assess the value of an object based on a comparison of valuation object with the same object, for which there is information on prices of transactions with them.

Determining the market value of the equity capital of the enterprise by the capital market based on the use of multipliers. Multiplier is a ratio showing the proportion between the market value of the company and any of its financial base (financial measure) [3].

On the basis of the data presented in Table 1 can be defined parameters for calculating multiples of analogues. These indicators drifts in Table 2, and payment multipliers carry out in Table 3, when calculating the multipliers in the numerator put the cost of company-analogue.

Table 2

Indicators for calculating the multipliers

Indicators, thousand KZT	Value
1 Revenue	1 316 440,29
2 Cost value, including depreciation	614 748,68 73 392,46
3 Commercial and administrative costs	208 258
4 Profit before taxation and payment of interests	493 433,32
5 Payment of interests (for long-term loans)	364,34
6 Profit before taxation	493 068,98
7 Net profit	394 455,18
8 Cash flow	467 847,64
9 Cash flow before payment of interests, taxes	566 825,78

Calculation of the following multipliers:

1) M_pp - the ratio of price to earnings before payment of interest,

2) M_pbt - the ratio of price to profit before taxation;

3) M_np - the ratio of price to net profit;

4) M_cf - the ratio of price to cash flow;

5) M_cfp - the ratio of price to cash flow before payment of interest.

It is necessary to distribute the weight of each in the sum of the values of the multiplier. The biggest weight will take to the multiplier - price net profit, because it is a priority in the ranking of interval multipliers. Thus, the weight of each multiplier distribute: M_pp = 0,19, M_pbt = 0,18, M_np = 0,25, M_cf = 0,19,M_cfp = 0,19.

Table 3

Calculation of multipliers of the company-analogue

Multiplier	Calculation	Value
1 Mpp	1 017 575/493 433,32	2,062
2 Mpbt	1 017 575/493 068,98	2,064
3 Mnp	1 017 575/394 455,18	2,58
4 Mcf	1 017 5 75/467 847,64	2,17
5 Mcfp	1 017 575/566 825,78	1,79

These multipliers are used in determining the reasonableestimated market value of the company(but it does not reflect the stock market). The estimated fair market value of the enterprise (the assessment of its own capital) is determined by multiplying the multiplier obtained by the company-analogue, the corresponding figure for the assessed company. The value of these parameters being evaluated are calculated based on data from the profit and loss account is similar to the data in Table 2. The results are summarized in Table 4.

Table 4

Determining the value of own capital being evaluated by multiples of company-analogue

Indicator	The value of the indicator by estimating company, thousand KZT	The value of the multiplier by the company-analogue	The value of estimating company, thousand KZT
1 Revenue	1 421 451
2 Cost value, including depreciation	926 499 88 380,6
3 Commercial and administrative costs	243 641
4 Profit before payment of interests, taxes	251 311	2,062	518 203,3
5 Payment of interests (for long-term loans)	961
6 Profit before the taxation	250 350	2,064	516 722,4
7 Net profit	200 280	2,58	516 722,4
8 Cash flow	288 660,6	2,17	626 393,5
9 Cash flow before payment of interests, taxes	339 691,6	1,79	597 307,96

Estimated value of the object is determined method of the capital market as weighted sum of the received values in Table 4, and is as follows:

V_ca = 518 203,3*0,19 + 516 722,4*0,18 + 516 722,4*0,25 + 626 393,5*0,19 + 597 307,96*0,19 = 553 152,54 thousand KZT

Thus, the enterprise value of “XXX” JSC, designed by the method of capital market is 553 152, 54 thousand KZT.

Enterprise value calculated only by comparative approach does not adequately reflect the real value of the company, for the reasons described above. To do this, it is need to calculate the cost of business by income and cost approaches.

References:

1 A.A. Sigankov Valuation of business. Lectures. Мoscow, 2010.

2 S.V. Valdajtsev Valuation of business: 3 edition, 2008.

3 V. M. Rutgaizer Valuation of business. INFRA, Moscow 2009.

4 www.stat.gov.kz

5 www.kase.kz