Valuation of Negative Earning Firms

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Author(s): Faisal Usmani (Aligarh Muslim University, India), Atif Ghayas (Aligarh Muslim University, India)and Mohd Sarim (Aligarh Muslim University, India)
Copyright: 2020
Pages: 11
Source title: Valuation Challenges and Solutions in Contemporary Businesses
Source Author(s)/Editor(s): Sinem Derindere Köseoğlu (Independent Researcher, Turkey)
DOI: 10.4018/978-1-7998-1086-5.ch007

Keywords: Business & Management / Business and Organizational Research / Business Science Reference / Risk Management & Analysis

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Abstract

This book mostly concentrates on firms with positive earnings, but this chapter focuses on the negative earnings firms or firms with very low earnings. It is easier to value a positive earning firm than a company with negative earnings. Analyzing negative earning firms has always created problems for researchers and analysts. In case of a negative earning firm, growth rates cannot be predicted or used in the valuation of firms. When current income of the firms is negative, growth rate will make it more negative. Tax computation becomes more complicated and the Going Concern Assumption does not apply properly. Authors start with complications in valuing negative earning firms, discuss the causes of negative earnings, and whether the problem is short-term, long-term, or cyclical in nature. Finally, authors provide the appropriate valuation technique for each case.

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