Question

how do you value a firm which has negative profits for initial period?

Answer 1

You can use Price to sales ratio

Answer 2

For an early-stage company you may be using metrics that indicate future earnings potential (even though the idea of using revenue multiples makes me throw up a little in my mouth), while earnings from cyclical businesses (e.g., logging companies, residential builders) should always be normalized to the extent possible.

Alternatively, one could purchase a cash flow negative business based on nothing more than asset value (although outstanding liabilities must be taken into consideration) if the game plan is to profit by liquidating those assets of the unprofitable business.

In any valuation attention should be paid to non-balance sheet assets like specialist skills/knowledge, employees, customer base, access to particular markets etc. which are often the most important factors for potential buyers, but very difficult to put a value to.

Ultimately, any valuation will be subject to negotiation and further more the only realistic value of a business is what somebody is willing to pay for it.

Answer 3

@gford22 You may find P/S ratio disgusting but it is used by industry veterans, it was popularized by Phil Fisher. It is one of the main indicators used to value growth companies.Obviously any price multiple doesnt say the whole story its just the starting point of your analysis.