What is Sum Of The Parts (SOTP) Valuation?
Sum Of The Parts (SOTP) valuation is an approach to valuing a firm by separately assessing the value of each business segment or subsidiary and adding them up to get the total value of the firm. It can be used in conjunction with various valuation techniques such as Discounted Cash Flow (DCF) modeling and comparable company analysis.
Example of Sum Of The Parts (SOTP) Valuation
Below is a screenshot of a Sum Of The Parts (SOTP) valuation from CFI’s Advanced Financial Modeling Course on Amazon. As you can see in the image below, Amazon is divided into several different business segments, which are each separately valued using comparable company analysis and then added together at the end.
Steps in Performing SOTP Valuation Analysis
Below are the steps required to perform SOTP valuation analysis:
#1 Determine the Business Segments
The first step is to determine what the appropriate business segments should be to value the firm. Many companies report segmented information, which makes things easier. If they don’t, it may take some deeper digging to get a breakdown of performance across different parts of the company.
#2 Value Each Segment
Once you know the various segments, you must then pick a valuation method for each one. You would most likely pick either a DCF (intrinsic value) or Comps model (relative value) to value each one. In the example from CFI’s Amazon Valuation Course, we use Comps to value each segment and apply an EV/Revenue multiple or EV/EBITDA multiple to each segment.
#3 Add Up the Total
The final step is to add up all the segments and make any necessary adjustments. In the case of Amazon, we add up each business unit to get the total enterprise value of the company. Then, we add cash and subtract net debt to get the total equity value, and finally, divide the figure by the weighted average shares outstanding to arrive at the target price per share.
When to Use SOTP Valuation
SOTP valuation is very useful for some companies, but not for others. Below is a list of examples of when this type of analysis is useful, and when it isn’t.
- Companies that report different business segments or divisions (i.e., Amazon)
- Holding companies or conglomerates with many different companies (i.e., GE)
- Companies with distinct assets (i.e., mining companies)
- Situations that require a high degree of detail (i.e., building a financial model for an acquisition)
Not suitable for:
- Companies with a single line of business
- Companies that don’t disclose any segments and where that information can’t be found
- Where a simple, less-detailed model is appropriate
Thank you for reading this guide to Sum Of The Parts (SOTP) valuation. CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)® designation, designed to transform anyone into a world-class financial analyst. To learn more, these additional resources will be helpful: