Question

Suppose Company ABC Ltd. is the manufacturer of Refrigerators and this company is counted in top ten companies of Pakistan with high market capitalization and quality production. The company is consistent in generating profits each year, hence its share is considered as an attractive investment for investors. The company has captured major market shares and is very keen about its Going Concern Value, because its management believes that if they will not grow they will liquidate. Why the going concern value is so important for company and they are escaping from liquidation value.

Answer 1

Going Concern value refers to value of the organisation considering that the organisation continues its business for indefinite eriod of time i.e. it is not going to dissolve in the forseeable future. There are multiple methods of valuing an organisaton, the most common being its Book Valuation whereby its Net Worth is determined. Net Worth can be expressed as the difference of the Total Assets of the Organisation and its External Liabilities. This Net Worth denotes the value available to the shareholders of the Company. So, for a company that has quality production with consistent profits, Net Worth is bound to increase year on year. Accordingly, even though there may be temporary reduction in value of the organisation's assets in its external environment, the valuation of the company won't afftect much as there is future viability and the company has a long term approach.

On the other hand, Liquidation Value refers to the worth companys assets would fetch if the business is shut down, and assets are sold in the market. Such value is the residue of Recoverable Value of the Company's Assets after paying off its external liabilities. This will take into consideraton the current market values and therefore can be quite lower than the Book Values depending upon the market scenario.

So liquidaton values are always on the lower side, since these values are relavant only for organisations that are unable to perform well or that are uanable to generate profits. Accordingly every company tends to go for Going Concern Values rather than Liquidation Values.