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Liquidation Value
Article by
Dheeraj Vaidya, CFA, FRM

What is Liquidation Value?

Liquidation value is defined as the value of the assets that remain if the
company goes out of business and is no more a going concern; assets
included in liquidation value includes tangible assets like real estate,
machinery, equipment, investment etc but excludes the intangible assets.

Unlike human beings, a company is not a natural person. Its identity is different
from that of its owners and managers. So, a death which seems to be inevitable
for human beings is something which can be avoided from a company’s point
of view. Many companies go on for hundreds of years. However, even a
company can shut down at either on account of law ﴾mostly on account of
bankruptcy﴿ or at the discretion of the management or the desire of the owners
of the company.

Let us look at Fitbit’s share price movement over the past few quarters. We note
that Fitbit stock plummeted by more than 90%. Does this mean Fitbit is now
trading at an all‐time low and is a buying opportunity? One way to perform a
valuation check is to compare Fitbit’s share price with its Liquidation Value.

Is Fitbit trading below its liquidation value? 

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In this article, we discuss Liquidation value in detail –

Definition

Book Value vs. Liquidation Value of an asset

Salvage Value vs. Liquidation Value of an asset

Liquidation Value Calculation of a Company

FITBIT’s Example

Tangible Book Value as a proxy 

Noble Corp – Example

Transocean – Example

Fiat Chrysler Example 

Liquidation Value Definition

Liquidation is nothing but the process by which the company’s business is
brought to an end, and the company is dissolved. All the assets which belong
to the company are distributed amongst its creditors, lenders, shareholders, etc.
on the basis of seniority of claims.

Liquidation value is the total worth of a company’s tangible assets (physical

assets) when it goes out of business. Tangible assets – fixed as well as
current – are considered while calculating the liquidation value of the
company. However, intangible assets such as goodwill are not included in the
 company. However, intangible assets such as goodwill are not included in the
same.

Book Value vs. Liquidation Value of an asset

Before understanding more about liquidation value, let us understand the
meaning of “book value of assets” of a company. The book value of the asset
is the value at which the asset is carried on a balance sheet. This is arrived by
deducting total accumulated depreciation from the total cost of acquisition.

E.g.: Company ABC purchases a piece of office furniture at the price of $

1,00,000. Apart from the purchase price, they also end up paying the following
expenses to bring the furniture to the required location:

Loading & unloading charges – $ 1,000

Interest charges to be paid on borrowed funds for buying furniture – $

2,500

So total cost of acquisition will be $ 1,00,000 + $ 1,000 + $ 2,500 = $ 1,03,500

Depreciation on furniture ﴾for the sake of convenience let us say that the
depreciation rate is 10% p.a. on the written down value﴿

Year 1 = 10% * $ 1,03,500 = $ 10,350

Year 2 = 10% * ﴾$ 1,03,500 – $ 10,350﴿ = $ 9,315

So, the book value of this piece of office furniture at the end of year 2 will be $
1,03,500 – $ 10,350 – $ 9,315 = $ 83,835.

If we were to take the liquidation value of the above furniture, we would look
more at the market value of the asset rather than the book value of the asset.
The current market price, which it can fetch at the end of 2 years, is $ 90,000,
and this will be considered as the liquidation value and not $ 83,835, which is
the book value of the asset.

The simplest explanation for the above is that when a company is in the
The simplest explanation for the above is that when a company is in the
liquidation phase, it is putting an end to its business and selling its assets to
pay its debt. In this case, it is obvious that the selling price will be considered as
the liquidation value and not the book value.

Salvage Value vs. Liquidation Value of an asset

Now, there is something known as the “salvage value” of assets. This, again, is
different from the liquidation value of the asset. The salvage value is the
estimated value of the asset at the end of the asset’s useful life. At the time of
liquidation, the asset may or may not have reached the end of its useful life,
and it may fetch more than the salvage value.

E.g., The office furniture in the above example has a useful life of 10 years, after
which its salvage value is expected to be $ 5000. But as clearly seen above that
the market value is $ 90,000 for the given asset, it will be considered as the
liquidation value.

Liquidation Value Calculation of a Company

The above pointers help us understand the liquidation value of a single asset.
On similar lines, let us now understand how to calculate the liquidation value of
the company as a whole. In the simplest terms, liquidation value tells you the
quantum which will be available to the shareholders if the company were to
shut down in a very short span of time.

The simplest way to find out this value is to go through the following steps:
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Step 1 – Prepare the Balance Sheet of the company.

Prepare the balance sheet of the company as per normal accounting policies
as on the date on which you would like to find out the liquidation value.

Following is the balance sheet of ABC Limited as on 31st December 2015:

Step 2 – Find the Market value of Tangible Assets.

Now, you take the tangible assets of the company and find the market values of
the same. At times, the purpose of finding the liquidation value may not
necessarily be to wind up the company. It can be done for analysis purposes, as
well. In this case, finding the market value for each and every asset may be
inconvenient, and many companies resort to assigning a recovery percentage
to each asset. This has to be as close to the market value as possible.

Some of the examples of recovery ratios are as follows:

Cash and bank deposits will have a recovery of 100%

Land owned by the company in a prime area may have a recovery of 150%
as land prices generally appreciate in most developed/developing areas.

Accounts receivables generally have a recovery percentage of around 65%

to 70%. This is because the business is coming to an end, and companies
do get away by not paying small amounts in case of winding up.

Now coming back to the above example, let us apply the above pointers to
figure out the recovery ratios for the assets:

Recovery Recovery
Assets Amount Comments
Ratio Value

Fixed Assets

The value of
land in the
area has
been
appreciated
since the
time the
company
had
purchased it.
The current
property
 property
prices in the
area suggest
$ $ that we can
Freehold Land 150%
50,00,000 75,00,000 earn a 50%
profit over
the original
purchase
price. Since
there was no
depreciation
on freehold
land, we
have applied
a flat
recovery
ratio of 150%
of the book
value.

The company
has found
similar
second‐hand
office
furniture
listed on e‐
commerce
Office $
50% $ 6,12,500 websites at
Furniture 12,25,000
this price.
That is why
the company
assumes it
can sell its
 furniture at
the same
rate.

The
machinery
has been
used on an
overtime
basis over
the past
years. The
depreciated
Plant &
$ 4,30,000 25% $ 1,07,500 value itself is
Machinery
less, and the
company
expects that
that they will
have to sell it
for a value
very close to
its salvage
value.

In this case,
the company
has spoken
to a second‐
hand car
Transportation
$ 4,50,000 75% $ 3,37,500 dealer, and
Vehicles
the rate is
determined
after
 consultation
with them.

Total Fixed $ $
   
Assets 71,05,000 85,57,500

Recovery Recovery
Assets Amount Comments
Ratio Value

Current
Assets

As
mentioned
earlier, small‐
timers don’t
end up
paying their
debt if the
company is
going to
liquidate,
and they will
Accounts
$ 3,00,000 75% $ 2,25,000 never have
Receivable
to worry
about their
future orders
with them. A
prudent
estimate is
that they will
be able to
fetch 75%
 from its
debtors.

Inventory

Raw material
lying in the
goods will
fetch a good
value as it is
not very
aged
a﴿ Raw inventory. So
$ 1,70,000 90% $ 1,53,000
Materials we can fairly
assume that
the fresh
stock can be
sold in the
market at
100% of its
value.

The company
does not
want to
spend its
time and
resources on
completing
the work‐in‐
progress. It
b﴿ Work‐in‐ intends to
$ 1,25,000 5% $ 6,250
progress sell the
 work‐in‐
progress
inventory as
scrap, and
the scrap
value will
fetch only
5% of the
total value.

Finished
goods
should fetch
100% but
considering
the time
frame to
liquidate the
c﴿ Finished
$ 3,00,000 90% $ 2,70,000 goods, the
Goods
company
might offer a
discount,
which is why
the recovery
ratio is
assumed to
be 90%.

The bank
balance is
also liquid,
and it will
definitely
Balances in fetch 100%.
  $ 70,000 100% $ 70,000
bank However, at
times there
are charges
on the
closure of an
account

Cash is
already
liquid, and
there is no
Cash‐in‐hand $ 5,000 100% $ 5,000
point in
applying a
recovery
ratio to it.

The company
has already
paid prepaid
insurance
for its stock,
and on the
closure of
business, the
insurance
Prepaid company will
$ 10,000 0% –
Insurance not pay back
the premium.
It is a kind of
loss which
the company
will have to
 suffer and
hence the
recovery
ratio of 0%

Total Current $ $
   
Assets 9,80,000 7,29,250

Since liquidation value does not take into account intangible assets; the market
value of all intangible assets will be marked as 0. ﴾Recovery ratio will be 0% in
this case﴿

In the above example, there are no intangible assets like goodwill. But the
company would have taken the recovery ratio as 0%, just like prepaid insurance.

Step 3 – Liquidation Value of Liabilities

Now, from the total liquidation value of all assets, you need to subtract all
liabilities. There is no point in calculating the market value of liabilities because,
unlike assets, there will be no separate book value and market value. You will
have to end up paying the entire amount reflected in the balance sheet.

Step 4 – Calculate Net Liquidation Value

The net amount derived from the amount will be the liquidation value of the
company, which will be available to the shareholders. There is a possibility
﴾especially in the case of bankrupt companies﴿ that the liquidation value may be
negative, which means that the company does not have enough assets to repay
its lenders. In this case, the lenders will be paid on the basis of the priority of
claims they hold on the assets of the company.

Let us drill down the above example of ABC Limited to determine how to arrive
at the final liquidation value for different stakeholders.
Total
Liquidation $
Value of 92,86,750
Assets

Less: Current $
Liabilities 10,50,000

In this case, the debt fund of the

company is only $ 4,50,000, as
Amount opposed to the total $ 82,36,750
available for $ available as liquidation value. This is a
Debt fund 82,36,750 very positive sign for the company
investors because, in most cases, the company
is not even able to pay its current
liabilities to the fullest extent.

Less:
Amount
outstanding $ 4,50,000
towards
Debt funds

Again, here the amount available for

Amount preference shareholders is more than
available for $ the value of preference shares, which
Preference 77,86,750 is just $ 15,00,000. So we pay them in
Shareholders full, and the net amount will be
available to the equity shareholders.

Less:
Amount
outstanding $
towards 15,00,000
 Preference
Shareholders

As per the balance sheet, we need to

add Reserves & Surplus to the total
Equity Shares issued by the company
Amount to figure out what is the actual
available for $ amount the shareholders should have
Equity  62,86,750 got ﴾$ 50,85,000﴿. In this case, the
Shareholders shareholders will get a profit over and
above the reserves and surplus of the
company. This is a dream come true
for any shareholder

FITBIT’s Example
Fitbit’s stock has taken a beating in the last few quarters ﴾as seen from the
graph below﴿.

In this example, we find out whether Fitbit is trading below its liquidation value.
source: ycharts

Step 1 – Download Fitbit’s Balance Sheet.

You can download the latest Fitbit’s Financials from here.

Step 2 – Find Liquidation Value of Fitbit’s Assets

In order to find the liquidation value of Fitbit’s asset, we assign a recovery rate
to each class of assets. The reasons for the recovery rate was discussed in the
earlier example.

Cash and Cash equivalents and Marketable Securities are assigned a

100% recovery rate.

Accounts Receivables is assigned a recovery rate of 75%

Inventories are assigned a recovery of 50%

 Prepaid expenses are assigned a recovery of 0%

Property Plant and equipment is assigned a recovery rate of 25%

Other assets are assigned a recovery rate of 50%

Goodwill, Intangible Assets, and Deferred Tax Assets are assigned a

recovery rate of 0%

The total Liquidation value of Assets comes out to be $1,154,433 ﴾‘000﴿

Step 3 – Find Liquidation Value of Fitbit’s Liabilities

We have assumed that all liabilities have to be paid out in full.

Each type of liabilities is therefore assigned a recovery rate of 100%

The total Liquidation value of Fitbit’s Liabilities is $573,122 ﴾‘000﴿.

Please note that Fitbit does not have debt in its book.
Step 4 – Calculate Net Liquidation Value of Fitbit

Net Liquidation Value Formula = Liquidation value of Assets – Liquidation

value of Liabilities

Net Liquidation Value of Fitbit = $1,154,433 ﴾‘000﴿ – $573,122 ﴾‘000﴿ =

$581,312 ﴾‘000﴿

Step 5 – Find Per Share Liquidation Value of Fitbit

In order to find the per share liquidation value, we require the total number of
shares outstanding.

We note that the total number of basic shares outstanding is 222,412 ﴾‘000﴿

source: Fitbit SEC Filings

Liquidation Value Per Share =  $581,312 ﴾‘000﴿ / 222,412 ﴾‘000﴿ = 2.61x

Fitbit is trading at 2.61x of its liquidation value. This implies that Fitbit is trading
very close to its liquidation value. If this stock falls further, then it will be a buy.

Using Tangible Book Value as a proxy

Tangible book value is calculated by subtracting all intangible assets like
Goodwill, Patents, Copyrights, etc. from the Book Value of the firm.

Tangible Book Value Formula = Book Value of Assets – Book Value of

Liabilities – Intangible Assets

Let’s compare the Tangible Book Value formula with that of the Liquidation
Value formula.
 Liquidation Value Formula = Liquidation Value of Assets – Liquidation
Value of Liabilities

While liquidation, the Liquidation value of Liabilities = Book Value of Liabilities.

So the formula above becomes,

Liquidation Value Formula = Liquidation Value of Assets – Book  Value

of Liabilities

Now coming to the calculation of Liquidation Value of Assets = SUM ﴾recovery

rate of each asset x book value of assets﴿.

In this formula, we assume that the recovery rate of Intangible Assets is 0%.
 This removes intangible assets from the liquidation value of Assets.

For other assets, the recovery rate is less than 100%, and therefore Liquidation
value of Assets is less than ﴾Book value of Assets – Intangible Assets﴿.

We note that even though Liquidation value is less than the Tangible book
value, it is a great proxy for identifying stocks that are trading close ﴾below﴿ the
liquidation value.

Using the Price to tangible book value ratio provides us with a relative
valuation multiple for making such a comparison.

If Price to tangible book value is less than 1, then the share price is
trading below its tangible book value. This implies that if the company is
liquidated today, the shareholders will profit from higher tangible book
value.

If Price to tangible book value is greater than 1, then the share price is
trading above its tangible book value. This implies that if the company is
liquidated today, the shareholders will be at a loss.

Let us pick some practical examples where Tangible Book Value ﴾~Liquidation
value﴿ is greater than the Share Price.
value﴿ is greater than the Share Price.

Noble Corp Example

Take a look at Noble Corp Price to Tangible Book Value. Noble Corp owns and
operates advanced fleets in the offshore drilling industry.

source: ycharts

Noble Corp’s tangible book value was above 1.0x in 2012‐2013. Due to the
slowdown in the commodities ﴾Oil﴿, Noble Corp stock prices plummeted from a
high of $32.50 in July 2013 to $6.87 currently. This resulted in a share
decrease in Price to Tangible book value and is currently trading at 0.23x.
source: ycharts

Transocean Example

Likewise, have a look at Transocean’s Price to Tangible Book Value. Transocean

is an offshore drilling contractor and is based in Vernier, Switzerland.

source: ycharts

We note a similar trend in Transocean Price to Tangible Book value. In 2013,

Transocean was trading at a price to tangible book value of 1.62x; however, it
has sharply declined to 0.361x currently. Transocean is another example where
Liquidation value is greater than that of the Stock Price.

Let us now pick some other examples where the Liquidation value is negative.

Fiat Chrysler Example

Stocks with negative Liquidation Value implies that if these companies are
liquidated today, the shareholders will not be able to recover their investments.
Let us take Fiat Chrysler’s example.

Fiat Chrysler’s price to book value is 0.966x; however, its Price to “tangible”
book value is ‐2.08x. This implies that if Fiat Chrysler is to liquidate today, the
shareholders will not recover their money ﴾forgot about profiting from the
investment﴿.

source: ycharts

Liquidation Value Video

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