Reproduction cost is one way that investors can come up with a value for a company. Many people would argue that this is the most accurate way to come up with a company’s value. Here are the basics of reproduction cost and how you can value a company using this method.

Reproduction Cost

You will essentially be trying to create an exact replica of a company financially in order to determine what the true value of a particular company is. This method is commonly used in real estate appraisals and it can be applicable to valuing a company as well. In real estate, the appraiser tries to determine how much it would cost to build an exact replica of a subject property. In the business world, you are going to be doing the exact same thing with a company. This is a somewhat involved method, but it can bring you some good results when it comes to determining value.

This should not be confused with replacement cost. Replacement cost generally refers to how much it would cost to replace an asset with another similar one. With reproduction cost you are not trying to create a similar company. Instead, you are trying to re-create the exact same company. You are going for a perfect copy.

Balance Sheet

In order to start the process of valuing a company through the reproduction cost method, you are going to need to have access to the company balance sheet. As a prospective investor, this should be an easy document to find. You will use the numbers from the balance sheet to determine exactly what the company has in their possession. There are several things on the balance sheet that you will want to pay attention to.

The first thing that you will want to look at is the cash or cash equivalents. You can simply record the value of the cash because you do not have to make any assumptions. The same thing applies to any marketable securities that are owned by the company.

You will also need to see how much the company has in accounts receivable. In many cases, you may not be able to collect all of the money on the accounts receivable. Because of this, you may want to subtract a certain percentage from this amount. Taking 10 to 15 percent should be sufficient.

You will also need to add in the value of the inventory that is owned by the company. The equipment will need to be accounted for as well. The last thing that you need to evaluate is the real estate that is owned by the company. This can be difficult to determine a value for, but you can do it by looking at comparable properties that have sold within the most recent six months.

Liabilities

After you have completely totaled up all of the assets of the company, you will need to subtract the liabilities from that number. This should provide you with an approximate value for a replica company.

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