Going-Concern Value
Going concern value is a value that assumes the company will remain in business indefinitely and continue to be profitable. Going concern value is also known as total value. This differs from the value that would be realized if its assets were liquidated—the liquidation value—because an ongoing operation has the ability to continue to earn a profit, which contributes to its value. A company should always be considered a going concern unless there is a good reason to believe that it will be going out of business.
Going Concern Value
Definition
Going concern value refers to the value of a company assuming it will continue its business operations indefinitely and remain profitable. It is also known as total value. This is different from the liquidation value, which is the value realized if the company's assets are sold off. Since a going concern has the ability to continue generating profits, its value is higher. Unless there is sufficient reason to believe that the company will go out of business, it should always be considered as a going concern.
Origin
The concept of going concern value originated in the fields of accounting and financial analysis, dating back to the early 20th century. As businesses grew in size and capital markets developed, investors and analysts needed a method to assess a company's long-term profitability and financial health. The going concern assumption became a fundamental premise for preparing financial statements.
Categories and Characteristics
Going concern value is mainly divided into two categories:
- Intrinsic Value: Calculated based on the present value of the company's future cash flows, reflecting the true value of the company as a going concern.
- Market Value: Based on market expectations of the company's future profitability, usually reflected in the stock price.
Characteristics:
- Assumes the company will operate indefinitely.
- Considers future profitability and cash flows.
- Typically higher than liquidation value.
Specific Cases
Case 1: Suppose a tech company A has a going concern value of $1 billion, while its liquidation value is only $500 million. This is because company A has a strong R&D team and continuous innovation capabilities, and the market expects it to remain profitable in the future.
Case 2: A retail company B performs well in the market, with a going concern value of $200 million. However, due to intense market competition, its liquidation value is only $100 million. Investors value its ability to continue operating rather than its asset liquidation value.
Common Questions
Q1: What is the difference between going concern value and liquidation value?
A1: Going concern value assumes the company will operate indefinitely and remain profitable, while liquidation value is the value realized if the company ceases operations and sells all its assets.
Q2: Why is going concern value usually higher than liquidation value?
A2: Because going concern value considers the company's future profitability and cash flows, while liquidation value only considers the current market value of the assets.
