“Valuation of Business” (valuation of companies) is a series of articles launched by MoneyBol to apprise our readers about different aspects Valuation of business. In first such articles we will look at analysis of environment and the respective industry.

Analysis of environment

Before analyzing any business concern, it is very important to analyze the environment it exists in on the date of valuation. The aspects of environment which should not be overlooked in any case are:

  • Political
  • Social
  • Legal
  • Economic
  • Socio-political
  • Technological

These forces are largely outside the control and influence of a business, yet each one of them has the potential to impact the business both positively and negatively.

Analysis of industry trends

The kind of industry a business belongs to largely determines the valuation technique to be used. To assess the structure of any industry it is important to determine the strength of the following 5 forces:

  • Bargaining power of suppliers
  • Bargaining power of buyers
  • Threat of new entrants
  • Threat of substitutes
  • Rivalry among competitors

Together, the strength of these forces determines the profit potential in an industry by influencing the prices, costs, and required investments of businesses—the elements of return on investment. Stronger forces are associated with a more challenging business environment.

Also, the general price movement of the shares of companies of a particular industry largely influences the price movement of any individual company. Hence this factor must not be ignored before jumping into any conclusions.

Keep visiting our website for further articles which would take up company specific ananlysis for valuation.

Author name: Preeti Patawari, MBA- Intl Business (IMT)