Sum-of-the-Parts Valuation (SOTP)

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Definition of 'Sum-of-the-Parts Valuation (SOTP)'

The sum-of-the-parts valuation (SOTP) method is a method of valuing a company by adding up the value of its individual parts. This is in contrast to the market value approach, which values a company based on its current share price.

The SOTP method is often used when valuing a company that is not publicly traded, as there is no readily available market price for its shares. It can also be used to value a company that is undergoing a major restructuring or acquisition, as it provides a way to estimate the value of the company's individual assets and liabilities.

To perform a SOTP valuation, the analyst first identifies all of the company's assets and liabilities. The assets are then valued using a variety of methods, such as the discounted cash flow method or the market value approach. The liabilities are then valued using the present value of their future cash flows.

Once the assets and liabilities have been valued, they are added together to arrive at the total value of the company. The analyst may then make adjustments to this value to reflect any other factors that they believe are relevant, such as the company's growth prospects or its competitive position.

The SOTP method is a relatively simple and straightforward method of valuing a company. However, it does have some limitations. First, it can be difficult to identify all of the company's assets and liabilities. Second, the values of the assets and liabilities may be difficult to estimate. Third, the SOTP method does not take into account the synergies that may be created by combining the company's assets and liabilities.

Despite these limitations, the SOTP method can be a useful tool for valuing a company. It is particularly useful when valuing a company that is not publicly traded or that is undergoing a major restructuring or acquisition.

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