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Don’t confuse the company’s value with the value of shares

Company value vs. share value

It is essential to understand that whatever the value of a company’s shares is, it does not affect the value of the company but the other way around. The value of the shares results from the company’s value minus its debt.

When valuing the company, the net financial debt is subtracted from the value of the company. All financing that currently pays interest is financial debt. If the shareholders have put up 60% of the money and the financial creditors 40%, the value of the shares will be only 60% of the company’s value.

This is why the shares of some companies may have a negative value. For example, a company that is worth 10 million euros, but has 12 million euros of financial debt, has a negative value of two million euros.

In the event of a sale, the shareholders would receive nothing, the company would be bought for one euro, and the creditors would have to deduct two million euros from their debt. Otherwise, no sensible person would take over the company because they would buy it for less than its value.

Sometimes the opposite can happen. The shares of some companies can be vital because they have no debt, which increases their value.

When selling a company, to find out how much the shares are worth, subtract the net financial debt from the company’s total value, i.e. subtract the company’s debt and then add the cash on hand.

To get an idea, imagine you sell your house for 500,000 euros and have a mortgage of 300,000 euros. When you get paid after the sale, you will only receive 200,000 euros.

However, remember that debt does not necessarily mean having the wrong financial structure. Financing can be a powerful tool to boost your business and, consequently, your company’s value.

Let’s say your company has a turnover of 30 million euros but has accumulated a debt of 4.5 million euros. 4.5 million is invested in short- and long-term projects, such as buying machinery, building better structures and renovating the business.

The business will likely improve in the future thanks to the financing. However, you should ensure you understand that any accumulated debt will be subtracted from the value of your business.

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