Risk-based assessment

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The risk-based assessment is used to determine the objective company value. It includes the uncertainty of future developments that affect the company. In addition to the function of company valuation, it is of central importance for the risk-based assessment of strategic options for action and decisions, for example when weighing investment alternatives or assessing the selected corporate strategy.

General

You can't exactly predict the future. There are opportunities and dangers that cost and income deviations from plan can result. These deviations must be clearly distinguished from the fluctuations in the stock exchange price, since the capital market is not perfect. The company value is more of a key figure that condenses the risk-return profile of one or more strategy variants into one key figure. It therefore represents a value-oriented measure of performance.

Evaluation process

Traditional assessment

Traditional risk assessment uses the Capital Asset Pricing Model , CAPM for short . This is based on historical fluctuations in stock return, which are expressed by the beta factor.

${\displaystyle \beta ={\frac {\rho \cdot \sigma _{i}}{\sigma _{M}}}}$

? = Correlation of the stock return to the market return

?? = standard deviation of stock return

?? = standard deviation of market return

The discount rate k can be determined using the beta factor.

${\displaystyle k=r_{f}+r_{m}-r_{f}\cdot \beta }$

?? = risk-free base rate

?? = return on the market portfolio

The company value is now calculated by discounting the budgeted value of the most likely profit.

${\displaystyle UW={\frac {G_{P}}{k}}}$

However, this valuation model does not take into account the likelihood of insolvency, risks of future profit and the actual expectancy of the profit.

Risk-based assessment through aggregated earnings risks

The fundamental difference to the previous evaluation is that one does not look at the historical fluctuations in stock return, but rather inferring the risk-based cost of capital rate based on the aggregated earnings risks (e.g. volatility or standard deviation of cash flows ). The assumption here is the imperfection of the capital markets and a different development of the environmental influences in the future than in the past. These uncertain developments now mainly affect the 3 following factors.

1. the probability of bankruptcy
2. the expected value
3. the cost of capital

First, the probability of insolvency must be included in the decision-making process. The interest expense must be taken into account when calculating the ROCE ( Return on Capital Employed ).

Furthermore, the challenge in the quantitative evaluation of strategy variants is the determination of the respective risk-return profile, on the one hand with the assessment of the average return or cash flow to be expected, i.e. the expected value of the profit.

On the other hand, a realistic range of earnings and cash flow development must be determined from the identified and quantified risks. This is represented by a risk measure (standard deviation of the profit / return or the equity requirement (value at risk)) from which the cost of capital k can be calculated.

${\displaystyle k={\frac {1+r_{f}}{1-\lambda \cdot {\frac {\sigma _{G}}{EW_{G}}}d}}-1}$

"D" is the risk diversification factor, ie the proportion of risks that the valuation subject has to bear. Finally, the company value must be calculated as follows:

${\displaystyle UW={\frac {EW_{G}\cdot (1-p)}{k+p}}}$

This type of company value determination creates transparency about the scope of the discrepancies, false inaccuracies are avoided and a review of historical share price fluctuations is unnecessary.