Factors That Determine the Financial Worth of a Company
Financial capital is any non-financial asset measured by value in terms of financial assets used by businesses and entrepreneurs to purchase what they want to produce their goods or to offer their services to the market of the economy on which their business is based, i.e., retail, investment banking, commercial banking, etc. The financial assets, unlike the non-financial assets, are not held by a single person as in the case of land, buildings and machinery, but are owned by many entities. If you own a huge piece of property, you would be entitled to its value, as the value of your non-real estate assets is also important.
There are several types of financial capital, including: debt, equity, working capital, and cash. In case of large business that has to borrow money for investing its capital, the debt capital is usually taken as well as the equity capital. While for an individual who needs money to invest for his future growth and for building up his business, the cash capital is the preferred one.
There are various ways to determine the financial worth of a particular organization, such as the income and expenditures, the assets and liabilities, and its profit. As far as assessing the worth of an organization goes, it is very much dependent on the extent of its resources. Financial instruments such as loans and bonds, financial guarantees, business licenses, bank accounts, and other receivables and assets are the tools by which financial value can be determined.
A person has the liberty to assess the financial value of any business by the amount that he pays in tax. Thus, the tax inspector is actually making an assessment about the financial value of the company. This means that while the owner of the business does not pay any taxes, the tax inspector is giving a judgment on the company’s actual value in terms of its tax liability.
A third important aspect in evaluating financial value is the balance sheet of a company. The financial value is calculated by the difference between its assets and its liabilities. If the company does not have any assets, then its value is zero. However, if it does have some assets, then its value is zero multiplied with its debt and equity to get the net assets of the company. Thus, the company’s financial worth is the difference between its debt and equity.
The last but not the least is the profit margin, which is the part of the assets of a company that the owner pays for. However, the value of this part is determined by the owner’s capital contribution. and the total earnings of the company. These three factors are necessary to determine the financial worth of a business.