Why a simple multiple stops working
An earnings-based valuation multiplies a figure for sustainable earnings by a capitalisation factor that reflects risk. That works when the business has positive earnings that are reasonably stable. When earnings are negative, the arithmetic produces a negative number, which says nothing useful about what the business is worth. When earnings swing widely, there is no single figure that fairly represents them, and the answer depends almost entirely on which year is picked.
The response is not to adjust the earnings until a positive number appears. It is to ask why the earnings look the way they do, because the cause usually points to the right method. ASIC's guidance on expert reports lists several methods generally considered, including discounted cash flow (DCF), earnings multiples applied to future maintainable earnings, and the amount available on an orderly realisation of assets. The ATO's market valuation guidance says the primary method should be the most suitable one given the asset and how reliable the available information is, and recommends a cross-check where possible.
The cause of the losses or volatility points to the method
What pattern do the earnings show?
One-off loss year
Normalised maintainable earnings, often excluding or adjusting the loss year, with a cross-check.
Turnaround
DCF using a forecast with scenarios, with net assets as a floor.
Early-stage growth
DCF with scenarios, the cost of building the asset, and any recent genuine arm's-length investment examined with care.
Structurally loss-making
Net assets on an orderly realisation basis. Equity value may be low or nil.
Asset-rich, low profit
Earnings-based value compared with net realisable assets. The higher reflects what a rational owner could achieve.
What a valuer actually looks at
The cause of the losses or volatility
The first job is a clear explanation, backed by documents, of what happened. Was there a single event, such as a lost contract, a flood or a dispute? Is the business new and still building revenue? Is the business in a market that has moved away from it? Has the owner been investing heavily in something that has not yet paid off? Each answer leads somewhere different.
Evidence for the future, not just hope
Where the case for value rests on improvement, the valuer looks for evidence that existed at the valuation date: signed contracts, a cost base already reduced, current trading already improving, funding already in place. ASIC's guidance on expert reports says a DCF can be used before a project produces cash flows only where there are reasonable grounds for the forward-looking information, and that other methods should be used where there are not. The same discipline is sensible in any valuation.
What the assets would realise
Whatever the earnings, the business owns things: equipment, stock, receivables, property, intellectual property. What those would bring in an orderly sale, after selling costs and after paying what the business owes, gives a reference point. Where the earnings-based figure falls below it, the question becomes whether an owner would rationally keep operating, or would be better off selling the assets.
Decision table
| Pattern | What it usually looks like | Methods usually considered | Key evidence |
|---|---|---|---|
| One-off loss year | Profitable in most years; one year hit by a documented event that has ended | Normalised maintainable earnings, often excluding or adjusting the loss year, with a cross-check | Cause of the loss, proof it has ended, results since |
| Turnaround | Losses for a period, with a specific cause that has been or is being fixed | DCF using a forecast with scenarios; net assets as a floor | Signed contracts, cost reductions already made, current trading |
| Early-stage growth | Revenue growing, losses because of spending ahead of scale | DCF with scenarios; the cost of building the asset; terms of recent genuine arm's-length investment, if any, examined with care | Unit economics, customer retention, funding runway, forecast support |
| Structurally loss-making | Losses with no realistic, evidenced path to profit | Net assets on an orderly realisation basis; equity value may be low or nil | Realisable values of assets, liabilities, selling costs |
| Asset-rich, low profit | Small profit relative to substantial assets such as property or plant | Earnings-based value compared with net realisable assets; the higher reflects what a rational owner could achieve | Independent asset valuations, the earnings-based assessment |
Two cautions apply across the table. First, in a volatile business, the choice of years matters a great deal; see which year's profit a valuation should use. Second, normalisation is not a way to remove losses. Every add-back still has to pass the test in what counts as a non-recurring expense.
Worked example: asset-rich, low profit
This example is hypothetical. The earnings-based figure is an assumption for illustration, not the result of any market multiple.
A manufacturing business has normalised EBITDA of $50,000 after a market cost for the owner's role. Assume a careful earnings-based assessment indicates a value of $150,000 for the shares, after deducting the business's debts (the same debts included in the liabilities below). The business owns plant and holds stock.
Orderly realisation of net assets
| Item | Amount |
|---|---|
| Plant, estimated realisable value in an orderly sale | $400,000 |
| Less selling costs on plant (assumed 10%) | -$40,000 |
| Plant, net | $360,000 |
| Stock, estimated realisable value | $80,000 |
| Total net realisable assets | $440,000 |
| Less liabilities to be paid, including estimated wind-down costs such as redundancies and lease exits | -$120,000 |
| Net amount available on orderly realisation | $320,000 |
Checking: $400,000 × 10% = $40,000. $400,000 - $40,000 = $360,000. $360,000 + $80,000 = $440,000. $440,000 - $120,000 = $320,000.
An orderly realisation of the assets leaves $320,000
- Plant, estimated realisable value in an orderly sale$400,000
- Selling costs on plant (assumed 10%)−$40,000
- Stock, estimated realisable value+$80,000
- Liabilities to be paid, including estimated wind-down costs−$120,000
- Net amount available on orderly realisation$320,000
Scale starts above zero so the changes are visible. Totals are cut short.
Selling the assets would yield more than double the earnings-based value
- Earnings-based value of the shares (assumed)$150,000
- Net amount available on orderly realisation$320,000
The orderly realisation figure of $320,000 is more than double the earnings-based $150,000. A rational owner who controls the business would not sell it for $150,000 when selling the assets would yield $320,000 after the selling costs, wind-down costs and debts assumed in this simplified example (a full realisation analysis would also allow for stock selling costs and tax). A minority holder who cannot force a sale may not be able to rely on that floor. In this situation the net asset figure usually becomes the more relevant reference, and the earnings-based value suggests the business has little or no goodwill. See what goodwill is in a business valuation.
Why the capitalised earnings calculator does not fit here
The capitalised earnings sensitivity tool shows how a value moves when maintainable earnings and the capitalisation factor change. It assumes the earnings figure is positive and reasonably stable. With negative earnings, any multiple produces a negative figure that is not a value. With volatile earnings, the output changes so much depending on which year is entered that it gives false comfort. For the patterns in this guide, use it only to test a normalised figure that has already been properly supported, such as the one-off loss case, and not as the main method.
Limitations
- This guide does not cover the value of carried-forward tax losses or other tax attributes. Whether they can be used, and by whom, depends on tax rules that need specific advice.
- Insolvency raises separate legal questions. If a business may be unable to pay its debts as they fall due, the directors should get legal and insolvency advice promptly.
- Realisable values of specialised assets can be very uncertain. Independent asset valuations may be needed.
- Tax on realising assets, such as balancing adjustments on plant sold above its tax written-down value, can reduce the amount available and needs tax advice.
- A particular buyer may see value that the market as a whole does not, for example through cost savings in combining businesses. A market value assumes a hypothetical buyer, and the ATO market valuation guide says market value does not reflect attributes that are of value to a specific owner or purchaser but not available to other buyers in the market.
The Oliver Group article on how to value a loss-making business looks more closely at the asset floor and turnaround forecasts, and the Oliver Group overview of business valuation methods compares the methods themselves.
Next steps
- Write a short, honest explanation of why earnings are negative or volatile, with documents for each cause.
- Gather at least three years of financial statements and current year-to-date results.
- List the main assets with any recent independent valuations, and the liabilities the business would need to pay.
- If the case rests on improvement, collect the evidence that existed at the valuation date: contracts, cost changes, current trading.
- Read how cash and debt affect a valuation to see how the business value flows through to the value of the shares.
Questions
Can a loss-making business be worth more than its assets?
Yes, if there is credible evidence it will become profitable, for example signed contracts or a cost problem that has already been fixed. That case is usually made through a forecast and a discounted cash flow, and it needs strong support.
Can the shares in a loss-making company be worth nothing?
They can. If the realisable value of the assets is less than what the company owes, there may be nothing left for shareholders. How cash and debt flow through to share value is covered in the guide on cash and debt.
Why can I not just use the capitalised earnings calculator with a small positive number?
Because choosing a positive number the business has not earned, and has no evidence of earning, would make the result look precise while resting on an assumption. The calculator is designed for businesses with positive, reasonably stable maintainable earnings.
Sources
- Regulatory Guide 111: Content of expert reports, Australian Securities and Investments Commission. RG 111.86 lists DCF, earnings multiples on future maintainable earnings and orderly realisation of assets; RG 111.116 says DCF can be used before cash flows begin only with reasonable grounds, otherwise other methods should be used.
- Market valuation for tax purposes, Australian Taxation Office. Describes the income, market and cost approaches, says the primary method should suit the asset and the reliability of available information, and recommends a cross-check method where possible.
Cite or reuse this page
Valuo Insights team (2026). How to value a business with negative or volatile earnings. Valuo. https://valuo.com.au/insights/valuing-a-business-with-negative-or-volatile-earnings/ (updated 14 November 2026).
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General educational information, not financial, tax or legal advice. Worked examples are hypothetical and do not value a real business. A valuation depends on its purpose, the evidence and the agreed scope.