Question

Many companies do not have a solid track record of profitability. This is sometimes because of losses incurred from operations or simply because no revenues have been generated, such as a mining company that is searching for precious metal deposits. Tesla, Inc. for example, had only losses being recorded from operations until late 2018. Explain how an investor might be able to estimate the value of a share where there are no profits historically.

Answer 1

When there are no profit which has been reported historically, then we are going to value share through cash flows associated with its operations and cash flows associated with the operation will be giving us an idea about the revenues associated with the company and we will be trying to value those companies in accordance with the industry standard,so even though the company is not reporting profits, we are going to discount their cash flows and we are going to find out their intrinsic value through discounting cash flows and they will be appropriate in such situations where the companies are not able to make continuous profits.

So, it can be said that discounting of the cash flow would be most appropriate method which will be suitable to those companies which are not making profits like Tesla.