This paper treats method based on assets of valuation of firm. So, after short theoretical considerations about this method we presented a practical study of valuation for a leasing firm. The method based on assets, also known as patrimonial method, the method based on costs and the method based on replacement costs, consists in correcting (adjusting) the book values of individual assets and company debts to convert them in market values.In this assessment, the company is mistaken with its assets, namely with the net asset, the valuator considering it as disjoined, respectively as an amount of assets.company value; method based on assets; patrimonial value Dependence, Option Pricing

Dan Florentin Sichigea

Dorel Berceanu

English

Research Papers in Economics

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DETERMINATION OF COMPANY VALUE BY THE APPROACH 
BASED ON ASSETS 
 
Dorel Berceanu 
University of Craiova, Romania 
Faculty of Economics and Business Administration 
 
Dan Florentin Sichigea 
University of Craiova, Romania 
Faculty of Economics and Business Administration 
 
Abstract:  
This paper treats method based on assets of valuation of firm. So, after short theoretical considerations 
about this method we presented a practical study of valuation for a leasing firm. The method based on assets, 
also known as patrimonial method, the method based on costs and the method based on replacement costs, 
consists in correcting (adjusting) the book values of individual assets and company debts to convert them in 
market values.In this assessment, the company is mistaken with its assets, namely with the net asset, the valuator 
considering it as disjoined, respectively as an amount of assets. 
 
Key words: company value; method based on assets; patrimonial value. 
 
1. Introduction 
The company has value because it owns assets of a certain value (real estates, lands, liquidities, 
etc.)  and  can  be  negotiated  separately,  outside  any  other  considerations.  The  evaluation  is  done 
checking the possible sale price of different assets composing the company (liquidation view), or the 
possible purchase price for the same assets (reconstruction view). Therefore, we can speak about 
patrimonial  methods  which  support  the  seller’s  point of view  and, although, they refer to  the 
company in its liquidation stage, creasing the activity and matrimonial method which support the 
buyer’s point of view referring to the situation of continuing the activity. But, there must be made an 
ascertainment  that: in  any case,  the  patrimonial  methods  ignore the company’s  capacity  to  create 
value, as it values only as much as the assets which compose it. 
 
2. Content 
Seen from the seller’s view, there can be established the following patrimonial assets for the 
company: 
￿  the total assets net value (the mathematic book value); 
￿  discounted net asset or reevaluated; 
￿  net asset corrected or amended (intrinsic mathematic value); 
￿  liquidation asset. 
The  total  assets  net  value  (ANc)  is  the  simplest  and  fastest  estimation  method,  being 
recommended, with precedence, for the evaluation of small companies. In case of relatively economic 
stability, ANc literally represents a patrimonial value of the company, as it comprises the invested 
capitals and the unassigned benefits. It is recommended to use this method only in conditions of 
stability, as it uses historical costs which loose their significance in case of an inflationary economy. 
Despite all this, even if in our country we can not speak about stability, this method had been used in 
the management/employee buy-out process (MEBO method) and in the process of mass privatization. 
The main reason to select such type of method represents the possibility to calculate the net asset, 
without calling into requisition to the services of expert companies which not only require high costs, 
but also for a certain period of time.  
Other names for the same method are the evidenced net asset or net asset value. 
The evaluation based on the total assets net value is preferred by the owners whose company 
had been incorporated a long time ago, accumulated an important property, but which profitableness 
has the tendency to come to a standstill or event to regress. The determination of the total assets net 
value is done based on the data from the last balance sheet where the result of the financial year had Journal of Applied Economic Sciences Journal of Applied Economic Sciences Journal of Applied Economic Sciences Journal of Applied Economic Sciences            
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been assigned on destinations. Therefore, in the capital accounts we will not find the dividends to be 
assigned or the employees’ participation to the results of the exercise. Therefore, total assets net value 
corresponds to the value of capital accounts and is obtained as a difference between the total assets 
net value and the total book value of debts: 
ANc = Total assets value – total debts 
or breaking down the  aggregate asset into its components (long term  assets  and circulating 
assets): 
ANc = Long term assets + Circulating assets – Total debts 
Therefore, taking into considerations the accounting and fiscal usages, which alienate from the 
economic reality and, especially, the factors producing disturbances between the company balance 
sheet  and  economic  balance,  (the  currency  exchange  ratio,  price  evolution,  monetary  erosion, 
redemption system, etc.) there occurs the stringent necessity to correct the total assets net value. So, 
taking  into  consideration  the  accounting  and  fiscal  usages,  which  back  away  from  the  economic 
reality,  and,  especially,  the  factors  causing  disruptions  between  the  company  balance  sheet  and 
economic balance (the currency exchange ratio, price evolution, monetary erosion, redemption system, 
etc.) the need to correct the total assets net value appears as stringent. So, is done, first of all, when 
eliminating the non-values, when eliminating the provisions, when reevaluating the income units, the 
book debts and bond currencies etc., and also for correcting the asset elements depending the criteria 
of use. Therefore, first of all are eliminated the non-values, the provisions, are reevaluated the income 
units, the book debts and bond currencies etc., and also for the correction of assets elements depending 
on the utility criterion. 
If  the  corrections  made  refer  only  to  price  update  and  exchange  ration  it  is  obtained  the 
reevaluated net asset (ANr). 
But, if we take into account the entire group of factors which caused disturbances between the 
balance sheet and economic balance (which is founded based on the market exigencies) we obtain the 
corrected or reformed net asset (ANC). 
The reevaluated net asset (ANr) is the net property for the reevaluated values (updated) and 
represents the net property for the reevaluated values (updated). 
During the period when the inflation is measured with two or even three numbers its incidences 
are eliminated with the help of indexes calculated based on the price evolution or on the exchange 
ratio.  These  indexes  shall  apply  to  the initial  values of the asset  elements.  They  can  be  outlined 
separately for each element or generally as an average index. Usually, in practice, is often used the 
evaluation based on the average index. 
If pursuant to the diagnostic analysis it is noted that occurred modifications also in regard of 
debts, they shall be corrected in addition or in reduction. 
Corrected net asset (ANC) is the most used property value and it basically represents, the 
capital  amount  necessary  to  reconstruct  the  company  existent  net  property,  at  the  level  of  its 
availability real value. The inconvenience of the method of total asset net value, where the evaluation 
of its elements is performed at the historic cost impose the need to re-treat the balance sheet and to 
perform an economic balance to reflect, as precisely as possible, a company net property. Same as the 
method  for  reevaluated  net  asset,  also  now  the  main  modifications  shall  take  into  account  the 
patrimonial assets and very few of company debts.    
The main features of the model are: 
￿  operates with economic vales of property assets, but not with book values; 
￿  at the base of determination of the company value is the economic balance, not the balance 
sheet; 
￿  the company value is given by the value of the … the company value is given by the value 
of the corrected net property. 
The corrected net asset is based on the value of use (usage) of property elements needed for 
use. The value of use represents the price due to be paid in order to purchase, at the appropriate 
moment, an element capable of the same conditions of use, in the same working conditions, having the 
same period foreseen for residual use, same performances and same destination of use. Journal of Applied Economic Sciences Journal of Applied Economic Sciences Journal of Applied Economic Sciences Journal of Applied Economic Sciences            
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Elements outside the exploitation (needed for exploitation) are evaluated separately depending 
on the capitalization possibility. The later may be: lands, buildings, machines, deeds of property which 
can not be sold, stocks difficult to be sold etc. their evaluation is done at the net venal value which is 
the  amount  to  be  cashed  at  their  sale.  This  operation  to  separate  the  assets  necessary  for  the 
exploitation from the ones outside the exploitation has as effect the rise of beneficiary capacity in 
comparison with previous profits when by diagnosis it is noted the degree of use of assets patrimonial 
elements, weather by changing the destination of personal and real assets without any use or with 
reduce usage for performing the object of the exploitation of the respective company. 
For the cases of companies found in difficulty for which is estimated the reduction or even the 
ceasing of their activity, the reevaluated net asset or the corrected net asset is replaced with a net 
liquidation  asset  (ANL)  which  takes  into  account  if  the  liquidation  is  done  progressively  or 
immediately. 
View  by  the  buyer’s  point  of  view, there  can  be  established  the  following  values  for  the 
company: 
￿  substantial value (operational); 
￿  permanent capitals necessary for the exploitation. 
The substantial value is a notion with reference to the exploitation of the asset taking into 
consideration only the specific assets which contribute to the basic activity. Therefore, the substantial 
value is the total value of the existing assets available for the company, no matter of their financing 
method, which they effectively use in order to ensure the performance of the object of activity, which 
provide the continuity of the activity. This supposes that at the total of the asset is added the value of 
assets  used  by  the  company,  but  which  are  not  mentioned  in  its  accounting,  therefore  it  is  not 
freeholder. The non-corporate elements shall be separate and evaluated according to specific criteria. 
Also, at the base of company value established using this method stands the economic balance, the 
value being given, as we mentioned before, by the net property afferent to the main activity. 
The permanent capitals necessary for the exploitation (CPNE) contain the assets necessary 
for the exploitation plus the need of working capital for the exploitation. The assets are estimated at 
their net value, and the need for the working capital starting form the level of activity predicted. 
Therefore, we have the following calculation formulae: 
CPNE = Net assets for exploitation + NFRE 
CPNE does not show the real value of the company, but only the value of the capital necessary 
to  set  up  a  company  with  the  same  characteristics  as  the  evaluated  company.  CPNE  is  quite 
appropriate as value to the total economic asset of the company, as it reflects the entire resources 
necessary to set up the exploitation assets and the need of working capital for exploitation. 
For showing in practice the content of the evaluation method based on assets we determined the 
total assets value and the corrected net asset for the company S.C. RO LEASING S.A. Craiova in 
order  to  establish  the  value  of  shares  to  raise  the  authorized  capital.  At  the  evaluation  date,  the 
subscribed authorized capital was in amount of 12.808 millions lei divided into80.050 shares with a 
nominal value of 160.000 lei. 
 
Table 1. The evolution of the main financing economic-financial indexes 
 
C
r
t
.
 
n
o
 
Indexes  1996  1997  1998  1999  2000  2001  2002  2003 
1.  Authorized 
capital 
3.970,0  6.500,0  7.875,0  8.005,0  8.005,0  8.005,0  8.005,0  12.808,0 
2.  Capital accounts  4.099,8  7.538,6  9.997,7  11.777,2  13.091,0  16.150,3  17.137,3  18.716,2 
3.  Average no of 
employees 
1,7  9,5  11,5  13,2  13  13  13  13 
4.  Total incomes  314,1  5.962,5  10.487,8  15.640,8  21.625,4  29.047,5  29.687,2  29.442,8 
5.  Total expenses  104,3  1.723,9  4.211,7  6.647,5  13.367,6  18.670,9  23.532,3  24.247,9 
6.  Gross profit  209,8  4.238,6  6.276,1  8.993,3  8.257,8  10.376,6  6.154,9  5.194,8 
7.  Net profit  129,8  2.936,7  3.925,0  5.257,4  5.840,2  7.642,7  4.559,9  3.861.1 
8.  Assigned 
dividends 
-  1.864,8  3.506,2  3.748,0  4.300,0  4.400,0  3.418,0  2.160,0 Journal of Applied Economic Sciences Journal of Applied Economic Sciences Journal of Applied Economic Sciences Journal of Applied Economic Sciences            
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C
r
t
.
 
n
o
 
Indexes  1996  1997  1998  1999  2000  2001  2002  2003 
9.  Profitability 
(Gross profit/ 
total expenses)% 
201,2  245,9  149,0  135,3  61,8  55,6  26,2  21,4 
10.  Profitability of 
authorized 
capital (Net 
profit/ authorized 
capital) % 
3,3  45,2  49,8  65,7  73,0  95,5  57,0  30,1 
11.  Financial 
profitability 
(Net profit/ 
capital accounts) 
% 
103,2  39,0  39,3  44,6  44,6  47,3  26,6  20,6 
12.  Works 
productivity 
(incomes/ 
employee) 
mil. lei/ 
employee 
184,8  625,6  912,0  1.184,9  1.663,6  2.234,4  2.283,6  2.264,8 
 
The society registered during its period of existence a financial profit (due to shareholders) over 
the  average  profitability  from  the  banking  system  and  higher  than  the  interest  rate  without  risk, 
respectively the interest rate to CEC, the bank which guarantees entirely the population deposits.  
In cases when society is not quoted on the stock market, the establishment of its value presents 
interest,  first  of  all,  for  its  shareholders,  but  also  for  its  image  in  its  relations  with  third  parties 
(suppliers, clients, potential creditors).  
a. The determination of the book value per share at 31.12.2003 takes into consideration the 
non-evaluated balance elements as follows:  
1. Fully paid shares                         12.808.000  thousands lei 
2. Reserves                          5.889.087        thousands lei  
3. Capital accounts (total assets value)                     18.697.087   thousands lei  
4. Number of shares                                         80.050 
5. Book asset per share (3:4)                        233.568   lei  
 
b. The determination of the unitary value using the method of corrected net asset 
1. Total assets value at 31.12.2003*          18.697.087   thousands lei 
2. Doubtful clients and equipments which can not be  
    recovered at 31.12.2003              1.259.111   thousands lei  
3. Gross payments to be made, afferent to contracts in progress at  
    31.12.2003, during the period 2004-2007        25.069.828    thousands lei  
4. Total expenses afferent to incomes  
    (25.069.828 x 810,6 %0 registered in 2003)        20.321.602   thousands lei  
5. Gross profit (3-4-2)                    3.489.115   thousands lei  
6. Net profit (rd.5-rd.5x25%-rd.2x25%)               2.302.058   thousands lei  
7. Total corrected net asset (1+6)          20.999.145   thousands lei  
8. Number of shares                                   80.050 
9. Corrected net asset per share – lei                         262.325   lei  
 
It  is  noted  that  by  the  approached  based  on  assets,  the  values  obtained  are  enclosed  in  an 
acceptable tolerance, respectively 12%, which justifies the proposal for a sale value of shares between 
these intervals.  
 
 
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3. Conclusions 
Now, in our country, we consider that the approach based on assets will play a very important 
role because, although all companies have as main objective the rising of value, they do not have yet 
the role they should have on the exchange economy. 
The  patrimonial  values  do  not  cover  the  entire  value  of  a  company  and,  usually,  they  are 
avoided as exclusive values for transaction due to certain limits: 
￿  incorrect character, because the non corporatist elements are not taken into consideration; 
￿  strictly static character, as they do not take into consideration the company strategy; 
￿  complex character, due to the fact that, sometimes, it is difficult to have an accurate idea 
over the value of some assets from the company property, especially the industrial specific ones and, 
implicitly the risks of occurrence of errors are significant. 
The company is not only an amount of assets, book debts and debts, but it must be seen more of 
an “alive organism”, which beside the things mentioned before it disposes of a goodwill, intangible 
elements, market elements which make up the company goodwill, namely an additional value for the 
company, a fact which justifies the use of the method based on assets together with the methods based 
on income and comparison. Beside, the legislation mentioned precisely the use of several evaluation 
methods for the company in order to be sure that the company value is the most appropriate to the real 
one. 
 
Bibliography: 
[1] Berceanu D.; Ciurezu T., (2003), Company evaluation, Universitaria Publishing House, Craiova 
[2] Stan S. and the collective, (2003), Company evaluation, IROVAL Publishing House, Bucharest 
[3] ***, International evaluation standards, Sixth Edition, 2003. 
 

and the collective,

International evaluation standards, Sixth Edition,

DETERMINATION OF COMPANY VALUE BY THE APPROACH BASED ON ASSETS

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DETERMINATION OF COMPANY VALUE BY THE APPROACH BASED ON ASSETS

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