Question

how you value a shipping company

Answer 1

A shipping company being asset rich would be best valued by an asset based valuation and assuming the business is sold as a going concern also a valuation of future cash flows. 1/ Asset valuation; value the assets of the business by determining their fair value by reference to open market value. Subjectivity is likely where this is not possible for items such as intangible assets e.g. brand names etc and as such will be a negotiation point between the parties. Now deduct the value of liabilities to arrive at a fair value adjusted net asset value. 2/ Calculate the future cash flows of the business by reference to cash flow forecasts or historic results and discount these cash flows to present value to take account of the time value of money. The combination of 1 and 2 above would serve as a good starting point for negotiations. As a rough calculation in the absense of the detail mentioned above just do.... 1/ the net assets of the business as per the balance sheet and 2/ the current year result after tax per the profit and loss account discounted into perpetuity at a suitable discount rate eg 5%. To do this say profit after tax is 100 simply divide this by 0.05 (i.e. 5%) to get the present value of future cash flows 2,000. Hope this helps.

Answer 2

"the current year result after tax per the profit and loss account discounted into perpetuity at a suitable discount rate eg 5%. To do this say profit after tax is 100 simply divide this by 0.05 (i.e. 5%) to get the present value of future cash flows 2,000. Hope this helps."

Answer 3

^that would be a fairly unreliable method. Assuming that the way they did this year is likely to continue forever.

Answer 4

This is true, the abbreviated method at the end of my previous post is a 'rough calculation'. This could be refined by deducting the growth rate (g) from the discount rate to arrive at a growth adjusted discount rate. In the example above say the growth rate is 2% then 5% becomes 3%. The method for determining the growth rate can be arrived at by the following equation:
\[g=\left[ \sqrt[n]{x2/x1} \right]-1\]
Where n is the number of years with x1 being yr 1 profit and x2 being the last year profit, this will give the growth rate averaged over the period. To further enhance accuracy EBITDA or free cash flows could be substituted for profits to give a better approximation of actual cash flows. This is an over simplified method and in practice much more detailed work would be required surrounding future cash flows.