Since state owned companies are not necessarly profit based and mainly over-crowded with employees. Cash flow that they actualy have do not reflect theur potential cash flow. How to valuate state owned companies?
You mean comparables, like P/E ratio, PEG ratio etc. But it is so hard because these comperables are only for the listed companies while state owned companies are not publicly traded.
Since state owned companies are not profit oriented and there are no comparable that can actually reflect their values, and the cash flow they have can't reflect their true potentials why don't you just use Depreciated Replacement Cost Method, though it is a Traditional Method but might fit in this situation.
Florin Aliu
It is not easy to find comparables. By comparable, I am thinking of looking for a similar project/company in a similar city in a similar region with similar characteristics.
And see what are the statistics for such companies. And then try and make a guesstimate.
Joseph i was thinking also in the same way. Thank you a lot. In my point of view this answer fits the best to the situation. But do you agree that is a complex way to approach valuating state owned companies?
Florin Aliu It is not reasonable to expect an easy answer or approach if you ask a difficult question. Yes. Market-based valuation methods are inappropriate, irrelevant and difficult to apply if there are NO markets
Is there any dividend payment in this company? since the dividend payment is more reliable for DCF method, maybe you can try that way if you really want to apply the DCF.
Yucheng Wang I would prefer cash flow if possible. Dividends are very unreliable, especially for projecting into the future.
Joseph Tham you probably right, but from my point of view,the purpose of the valuation also need to be considered,
Hi
DCF would work, actual and potential cash flow may be different; but the value depends on expected cash flows. Potentiality is a key input for valuation. The value is a function of all future economic benefits expected, provided we have the right DCF.
Sorry for being late to this party. It depends actually if the state owned company competes with other commercial enterprise or not. If the state owned company is a bank, the general approach might still work. You will need to make appropriate adjustments to many things such as the discount rate. If the state owned company is being privatised, then the value is derived from what it could be rather than its current operations. For e.g. a state owned transport operator may not charge a commercial rate now, but once privatised, it may have the ability to do so. Hope this helps.
Florin,
State companies could be valuated when they are going to be sell to private sector. What they evaluate is the potential earnings, gained according to the strategic changes and orientation of the new board.
To fix a price of state companies, it is usually calculated on the base of the assets value, minus the labor liabilities.
I hope I have been helpful
I would prefer cash flow if possible. Dividends are very unreliable, especially for projecting into the future.
Also state owned companies are managed from the governement officials and divident goes directly to the state. Moreover, divident is not based on the performance but mainly from the government influence.
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