How to determine the value of a company

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

24 December 2023

How is the market value of a company determined? When ‘they’ say that Safaricom is worth all those billions of shillings, how do ‘they’ arrive at those figures? I am quite sure that this is a puzzle that confounds many readers, but it is quite easy to determine the market value of a company of a company whose shares are listed at the stock exchange. All that is needed is the open market price per share and the total number of shares in the company.

Safaricom is divided into 40 billion shares and, at the time of writing this article (18 December 2023), they were trading at Sh13.70 each. Therefore, the market value of the entire company is simply Sh13.70 x 40,000,000,000 = Sh548 billion. QED.

Now, there was a time (before 18 November 2022) when the share price was above Sh25. At that level, the value comes to over Sh25 x 40 billion shares = more than one trillion shillings! In fact, the value of Safaricom peaked at about Sh1.8 trillion in August 2021 when the share price reached Sh45.

During the recent joint media interview, President William Ruto said that the Kenya Pipeline Company is valued at Sh300 billion. When I heard him mention that figure, I was wondered how he arrived at it. So, I looked for the company’s financial statements.

The latest audited report is for 30 June 2022. It was signed off by the Auditor General on 24 April this year – 2023. It shows that the company had assets valued at Sh130 billion and liabilities worth Sh39B, bringing its net worth to Sh91B. This is far less than the Sh300B that the president mentioned.

But, could have been referring to it’s market value? That’s not straightforward to establish but we can get an idea by looking at the company’s income. In 2021/22, it made a profit of Sh3.82B (after taxation). Let us now compare that to Safaricom which made Sh52B last year.

Now, with a profit of Sh52B, Safaricom’s market value is Sh548B; that is, its value is about ten times its profit. If we apply the same factor to Kenya Pipeline, we get that its market value comes to about Sh38B. This is lower than the net asset value!

So, anyone negotiating to buy Kenya Pipeline will be looking to pay an amount between Sh38B and Sh91B. Certainly not Sh300B. It appears that some one misinformed the president!