Question

Why has it been so difficult to value companies during the coronavirus pandemic?

Answer 1

It is difficult to value companies during the coronavirus pandemic as the companies activities are affected on a massive scale by shortage of manpower and shutting down of the primary sources of supply of inventory. Valuation techniques used by companies are DCF analysis, comparable company analysis or precedent transactions.

Comparable analysis are based on the data relative to the other firms present in the industry. We compare on the basis of P/E ratio or EBIT. It is  difficult to value as the firm during pandemic as companies are facing delay in payments that are receivables which effects the revenue and profit margin of the firm. Companies liabilities are more as companies are not able to fulfill timely the day-to-day operating expenses which are effecting the overall business. Supplier of raw material may have shut down the business who are supplying to the company which acts a hault in the production. Therefore effecting the cash flow of business. Thus, difficult to apply the discounting valuation technique. Precedent transaction method is also not helping in valuation technique as the company with which comparison is done may have shut down or incurring a huge loss. Thus, companies of the same indusrties are facing different issues which makes the valuation difficult during pandemic.