A wide range of models exists in the market to value a company. May it be the evergreen Discounted Cash Flow Model (DCF), which considers the future cash flows of the company or more advanced RE and AEG Models. On the other hand, we would value a person based on her Net worth. The underlying assumption for all the models is that the value is dependent on money generated. However, in the real world, neither the value of a firm is assigned based on fundamental analysis nor a person’s worth is based on the amount hidden in her wallet. The Price-Earnings (P/E) Multiple is at all-time high (28x) when the economy is in doldrums and ofcourse Abdul Kalam is valued way higher than Subrata Roy.
Indeed, the value of the company and the person depends on the intangibles they possess. For a company, it is in the form of Intellectual Property, the expertise of employees, the brand perception among the customers etc., never can these intangibles be completely measured. And these factors contribute to the growth of the firm which drives the share price in the market. Similarly, the worth of a person is measured using the value system she is adhered to. Which also reflects the potential of the person thereby leading to her growth. Moreover, the growth of the person or company is dependent on the efficiency through which the investments are utilized.
The worth also depends, both, on the returns the company gauges for itself and also to its shareholders. For a person, the value is derived both from her ability to develop herself and the capability to contribute to others development. Return on Operating Assets (ROOA) reflects the core capabilities of the firm to generate wealth for itself with the assets employed. In the above case, only the operating income is considered which mostly eliminates the external interactions. Likewise, the value of a person is attached to the efficiency through which she could generate higher returns with low resources. The whole Tata Group is worth around $126 Billion and Facebook alone is worth around $350 Billion. The difference in the assets employed by both companies is well known. With minimal resources, Nelson Mandela could eliminate apartheid and with all the available resources Vijay Mallya escaped to London.
The other component which exemplifies the value is the Return on shareholders or well-wishers investment. Return on Common shareholders’ Equity (ROCE) demonstrates the ability of the firm to satisfy its investors. A firm is punished when it could not reach the expectations of its shareholders. Infosys had to forcefully opt for a Buyback as it could not please the investors. Similarly, a person’s social capital is shattered if the return on emotions invested is not satisfactory. Tiger Woods had to face the brunt of his wife for blatantly cheating her and Arvind Kejriwal was contended by people, for he could not reach their expectations.
In the first case, as the Asset turnover and Profit Margins are important for a company so does the discipline and hard work for a person. In the second case, as the Dividends payment and customer relationship are important for a firm, so does the person’s capability to instil trust among her well-wishers.