Going-Concern Value

Definition

Going concern value refers to the value of a company assuming it will continue its business indefinitely and remain profitable. It is also known as total value. This differs from the liquidation value, which is the value realized after the company's assets are liquidated, as a going concern has the ability to continue earning profits, thus increasing its value. Unless there is sufficient reason to believe a company will cease operations, it should always be considered a going concern.

Origin

The concept of going concern value originated in the fields of accounting and financial analysis, aimed at assessing the long-term value of a business under normal operating conditions. This concept matured with the development of modern corporate accounting standards, particularly in the mid-20th century, as the going concern assumption became a fundamental basis for financial reporting.

Categories and Features

Going concern value is primarily categorized into two types: value based on discounted future cash flows and value based on market comparison. The former is calculated by forecasting the company's future cash flows and discounting them, suitable for companies with stable growth; the latter estimates value by comparing similar companies' market values, applicable to industries with high market volatility. The main features of going concern value are its reliance on the company's future profitability and its sensitivity to market conditions and internal management.

Case Studies

A typical case is Apple Inc. In the early 2000s, Apple significantly enhanced its going concern value through innovative products like the iPod and iPhone. Through continuous product innovation and market expansion, Apple's going concern value far exceeded its liquidation value. Another example is Tesla, which, despite facing financial challenges in its early stages, saw its going concern value grow due to its leading position and technological innovation in the electric vehicle market.

Common Issues

Common issues investors face when evaluating going concern value include overly optimistic forecasts of future cash flows and ignoring the impact of market changes on a company's profitability. A common misconception is equating going concern value with the company's current market value, overlooking changes in its long-term profitability and market position.