4.4. Business value, company value and equity value

So far we have computed the business value of the company. But that does not necessarily correspond to the company value (value to the holders of capital: equity and debt) or to the equity value (holders of the equity). The business value is a result of the operational and investment activities of the company. But companies that have been in business may hold non-operating assets. The non-operating assets are not allocated to the activity of the company as these items do not add nor remove value to the operational activity. If the company sold these elements, the activity would not be affected. Some examples of potential non-operating assets:

• Excess cash and marketable securities: it is the amount of cash that exceeds the minimal cash balance. Considering excess cash can be debatable because the minimum cash balance stems from a management decision. Also, since excess cash may result from a management policy that favors days accounts payables larger than days of accounts receivables it holds a strategic importance and therefore it should not be considered as a non-operating asset. Nevertheless, the existence of large funds when compared to the company’s operating needs should hint at the such sums are not fundamental to company’s regular business.
• Interests in joint ventures, associates and subsidiaries: as a common principle companies held as a group should be valued individually.
• Obsolete assets: machinery or facilities that due to the evolution of the company no longer take part in the production process.

Although such items do not contribute to the production, they should be accounted as part of the company’s value, because if sold, such asset may generate a financial return.

The company value is equal to the addition of the business value to the non-operating assets.

Also, and as mentioned above, the company’s value is not the value of the equity holders. The value of the equity is equal to the company value less the debt value of the company.