Research On Enterprise Evaluation Method Based On Residual Income Model

With the development of value-based management, company valuation has become a major theoretical and practical problem. Valuation is the premise and basis for financial policies. It palys an important role in many areas such as investment, financial management, acquisitions and so on.The financial crisis in 2008 make people be aware that only a correct assessment of the true value of firms can be able to avoid the market bubbles. In China, with the establishment and development of market, Chinese capital market is gradually improving, the state-owned enterprises reform is deeper. At this point, how to scientifically assess the company valuation has become the focus of all parties:For business investors, only assess the true value of the enterprise can they know whether the target company is worth acquisiting; For individual investors, only assess the true value of the enterprise can they stay calm to make the right decisions: when the price is higher than the true value, they can sell the stock; When of the price is lower than the true value, they can buy the stock; For business owners, only assess the true value of enterprise can they understand the real factors that drive the true value of company so that they can properly formulate strategic plan, unify the target of business owners and managers and really improve the value-based management. So, how to assess the company valuation effectively become a common topic that interests domestic and foreign scholars.To assess the company valuation scientificly and effectively, a scientific and effective method for assessment is necessary. Residual Income Model(RIM) is such a kind of valuation model that accounting information is closely linked to company valuation. It palys an important role in valuation theory. In abroad, especially Europe and the United States, the research on RIM in theory and application is earlier and wider. The model has a complete system in theory and has been implemented in practice. However, because the development of enterprise evaluation is not as early as abroad in China and the limitations of the model itself in applications, few Chinese valuation institution use this model. But other methods whice are used now in current valuation institution can not assess enterprise valuation well. How to put such a good valuation model into practice in our company valuation to make the valuation results more scientific and accurate has become a company valuation problem to be solved in China.So, this paper discussed valuation method based on RIM by normative analysis and logical positivism (theoretical discussion and case analysis) First of all, it reviewed the current company valuation methods to point out that Residual Income Model is better; Than on the base of analysis of RIM basic form it pointed out that the basic form of this model still has some shortcomings in applications:the residual income is difficult to predict directly and the continuous value is incalculable. For these deficiencies, this paper has improved the original RIM:Firstly, decomposite the residual income into financial indicators that are uesed commonly by company financial analysis system. Meanwhile, through the discussion of the comprehensive income, this paper introduced MOS综合to repalce the net profit margin of sales used by majority of people to make the model more in line with the Clean Surplus Relation(CSR); Secondly, in order to avoid the limitations caused by the indefinite prediction, this paper improved the estimation method of continuing value to make the assessment of continuing value more operational and reliability; Finally, this paper choosed one of the listed companies in China:Shenzhen Energy Company as a case study to demonstrate the improved evaluation method and show how to use the improved evaluation method to evaluate a enterprise valuation.Demonstration results showed that:The modified valuation method based on RIM is more in line with the Clean Surplus Relation(CSR) in theory and more operational:It can helpfully guide the investors in the secondary market to make investment decisions;It can make the business owners and managers understand that what drives the true value of company is the residual income, what the companies can do is create their residual income if they want to improve their enterprise value. Perhaps the market's expectation will lead the price deviate from the true value of company, but in the long run, the deviation will return to the true value.By analyzing the demonstrate results, we can see that:Firstly, the enterprise value based on accounting data has a positive effect on the actual change of stock price. Accounting data can explain the value of company well. The true value of company can be effectively assessed by RIM which is directly linked to accounting data; Secondly, the use of residual income in the model has demonstrated that the value creation is the source of true value of enterprise. Investors and managers should focus on value creation. Only the company which create their residual income is the good company. Only the company which create the profit that is higher than cost of capital is the company that really protects shareholders.