ASSET-BASED VALUATION
Asset has been defined by the industry as transactions that would yield future economic benefits
as a result of past transactions. Hence, the value of investment opportunities is highly dependent
on the value that the asset will generate from now until the future. The value should also include
all cash flows that will be generated until the disposal of the asset.
In practice, valuation is a sensitive and confidential activity in portfolio management. Valuation
should be kept confidential to allow the company to negotiate a better position to acquire and
opportunity. Since the value of assets will depend on their ability to generate economic benefits, it
is more challenging to determine the value of a green field investment since value shall be
based on pure estimates compared to brown field investment.
❖ Green-field investments are investments that started from a scratch while,
❖ Brown-field investments are those opportunities that can be either partially or fully
operational. Brown-field investments are those already in the going concern state, as
most businesses are in the optimistic perspective that they will grow in the future.
Therefore, they can be considered as going concern business opportunities
(GCBOs). Going-concern business opportunities are those businesses that have a
long-term to infinite operational period.
The advantage of GCBOs is that we already have a reference for their performance - from
their historical performance or an existing business with a similar nature. With this, the risk
indicators can be identified easily and can be quantified accordingly.
The Committee of Sponsoring Organization of the Treadway Commission (COSO) suggests that
risk management principles must be observed in doing businesses and determining its
value. It was noted in their report that the benefits of having a sound Enterprise-wide Risk
Management allows the company to:
1. increase the opportunities;
2. facilitate management and identification of the risk factors that affect the business;
3. identify or create cost-efficient opportunities;
4. manage performance variability
5. improve management and distribution of resources across the enterprises
6. make the business more resilient to abrupt changes
The importance of identifying risks is to enable investors to quantify the impact of the risk and/or
the cost of managing these risks. Theoretically, asset value is dependent on the economic
benefits (i.e. cash flows) it gives. Since the entire company is driven by its asset base, the
value of the company can be best attributed to the value of its assets. The advantage of using
this approach is it enables the analyst to validate the firm value through the value of its assets.
Some approaches may rely on the ability of the asset to generate more revenues. However, this
only focuses on the current and historical value of the assets and will disregard the value it can
generate in the future and may not fully represent the true value of the assets.
In asset-based valuation, familiarity with the generally accepted accounting principles is a key
attribute for an analyst to enable them to establish the value. An asset-based valuation can be
used if the basis of the value is concretely established and complete. Information required for
Asset has been defined by the industry as transactions that would yield future economic benefits
as a result of past transactions. Hence, the value of investment opportunities is highly dependent
on the value that the asset will generate from now until the future. The value should also include
all cash flows that will be generated until the disposal of the asset.
In practice, valuation is a sensitive and confidential activity in portfolio management. Valuation
should be kept confidential to allow the company to negotiate a better position to acquire and
opportunity. Since the value of assets will depend on their ability to generate economic benefits, it
is more challenging to determine the value of a green field investment since value shall be
based on pure estimates compared to brown field investment.
❖ Green-field investments are investments that started from a scratch while,
❖ Brown-field investments are those opportunities that can be either partially or fully
operational. Brown-field investments are those already in the going concern state, as
most businesses are in the optimistic perspective that they will grow in the future.
Therefore, they can be considered as going concern business opportunities
(GCBOs). Going-concern business opportunities are those businesses that have a
long-term to infinite operational period.
The advantage of GCBOs is that we already have a reference for their performance - from
their historical performance or an existing business with a similar nature. With this, the risk
indicators can be identified easily and can be quantified accordingly.
The Committee of Sponsoring Organization of the Treadway Commission (COSO) suggests that
risk management principles must be observed in doing businesses and determining its
value. It was noted in their report that the benefits of having a sound Enterprise-wide Risk
Management allows the company to:
1. increase the opportunities;
2. facilitate management and identification of the risk factors that affect the business;
3. identify or create cost-efficient opportunities;
4. manage performance variability
5. improve management and distribution of resources across the enterprises
6. make the business more resilient to abrupt changes
The importance of identifying risks is to enable investors to quantify the impact of the risk and/or
the cost of managing these risks. Theoretically, asset value is dependent on the economic
benefits (i.e. cash flows) it gives. Since the entire company is driven by its asset base, the
value of the company can be best attributed to the value of its assets. The advantage of using
this approach is it enables the analyst to validate the firm value through the value of its assets.
Some approaches may rely on the ability of the asset to generate more revenues. However, this
only focuses on the current and historical value of the assets and will disregard the value it can
generate in the future and may not fully represent the true value of the assets.
In asset-based valuation, familiarity with the generally accepted accounting principles is a key
attribute for an analyst to enable them to establish the value. An asset-based valuation can be
used if the basis of the value is concretely established and complete. Information required for
