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Evaluation of Securities in Ukraine

Two hryvnias of the UPR of 1918

In most cases, when it comes to evaluation of securities, first of all, it is supposed to conduct an expert evaluation of the stocks. The purpose of such work, again in most cases, is to increase the authorized capital of the enterprise by carrying out an additional issue of shares. Therefore, this article focuses on this type of securities.

Stock Assessment

Determination of market value as such securities as shares have their own specificity. There are methodical approaches by which the valuation is carried out on the basis of information on the conducted transactions of purchase and sale of the same shares, or based on the amount of profit (dividends) that the securities brings to its owner. But in the absolute majority of real cases, the value of an enterprise is considered through the valuation of assets, which are on the balance sheet less the value of the company’s liabilities.

For example, there is a joint-stock company, which has on its balance sheet furniture and computer equipment, debts of third companies to our enterprise make 20,000 UAH, and we in turn owe someone 15,000 UAH. In result of revaluation of fixed assets (valuation of equipment and furniture) it was found that their market value is 10,000 UAH. Thus the value of the share capital, which is 100% of the authorised capital is defined as: 10,000 + 20,000 -15,000 = 15,000 UAH. The resulting value is also called the value of net assets, and it is also the main one when evaluating corporate rights of enterprises, which are not joint stock companies. Now it remains only to determine the value of one security by dividing the received amount by the total number of shares. Although, of course, this example only gives an overview of the process. After all, it is clear that the price of one share in a minority package will be significantly lower than the price of the same security, but in a package that gives the right of control. That is why it is important, at the initial stage of the negotiations, to decide on the size of the package that will be the subject of our work, because this may affect not only the outcome of the calculations, but also the procedure of the work.

Most of such work to determine the cost is mandatory to be agreed (check correctness) in National Securities And Stock Market Commission, so to the choice of appraisal company for this type of work you need to approach as carefully as possible. And the problem here is not even that the necessary specialization in permits is open to a relatively small number of firms (compared, for example, with permits to determine the value of real estate). The fact that the work with securities implies the presence of a specialist experience and a large number of specific knowledge that will provide the service qualitatively and with maximum benefit for the customer.

Bond valuation

The second most common type of valuation of securities is dealing with bonds. Unlike the determination of the market value of the shares, the value of the bonds is most often considered either through the amount of income that the paper will bring to its owner in the future or, based on information on the actual sale of bonds of the same issuer.

You should draw your attention that the market value of such securities is different from the nominal amount of income that the bond will bring in the future. For example, if a return of UAH 100,000 is expected in a year, the present value of such paper will be lower. This is because money changes its value over time. You can draw an analogy with a bank deposit: how much do you need to put on a deposit today at a rate of 16% per annum to get 100,000 UAH after a year? In this case, it is obvious that the current value of this deposit will be 100,000 / 1.16 = 86 200 UAH. About the same principle and is evaluation of bonds. This analogy is very simplistic, but in our view is quite applicable to a common understanding of the subject matter. After all, it is necessary to take into account the increased risks when working with such financial instruments. Bank deposits are guaranteed to varying degrees by the state, but the payment of the issuer’s obligations is unlikely to be guaranteed.

Valuation of securities of other types

In addition to determining the value of shares and bonds, in practice we sometimes encounter the need to evaluate securities and other types, in particular bills and investment certificates. At the same time, the procedure for handling bills is very similar to that for bonds, and investment certificates are by their nature similar to equities. Given the low prevalence of these types of securities, we will not discuss them in detail under this article. ut we will gladly answer all your questions by phone, email or in person at our office. Welcome!