The short answer, explained
Most trading businesses are valued from their earnings. That works when the earnings are large enough to give a fair return on the assets the business uses. In that case the earnings-based value is higher than the net assets, and the difference is goodwill (see what goodwill is).
Some businesses own a lot of plant, vehicles, property or stock and earn too little to justify those assets. An earnings-based value then comes out below the value of the assets themselves. A rational owner who controls the business would not sell it for less than the assets would bring if sold off in an orderly way. So the realisable value of the assets, after costs, becomes the floor.
The accounting standard on impairment uses similar logic for an asset or group of assets: AASB 136 sets recoverable amount as the higher of fair value less costs of disposal and value in use. Value in use is an earnings-style measure; fair value less costs of disposal is a sale-style measure. Whichever is higher governs.
When earnings are too thin for the assets, orderly realisation becomes the floor
How do the earnings compare with a fair return on the assets?
Well above a fair return
Earnings set the value. It exceeds net assets, and the difference is goodwill.
Close to a fair return
Earnings set the value, close to net assets, with little or no goodwill.
Below a fair return, assets readily saleable
The higher of the earnings value and orderly realisation of assets after costs, for a controlling owner.
Losses with no credible recovery
Orderly realisation, after selling and wind-down costs.
What a valuer looks at
Net assets as a floor, not a target. The figure that matters is what the assets would realise, not what they cost or their depreciated book value. business.gov.au suggests owners account for depreciation when working out asset value. A formal valuation goes further and looks at what a buyer would actually pay.
Orderly realisation. The floor is normally based on an orderly sale over a reasonable period, not a forced auction. From the gross proceeds the valuer deducts selling costs, and the costs of winding down: redundancies, lease exits, collecting debtors and paying creditors.
Plant and equipment valuations. For heavy equipment, a specialist plant and equipment valuer may be needed. The ATO's guide to market valuation notes that the cost approach is often used for plant forming part of a larger business to allocate value within the enterprise value. Plant can have one value in continued use within the business and a lower one if removed and sold.
Economic obsolescence. When the assets are physically sound but the business cannot earn an adequate return on them, the gap between their value in continued use and the earnings-supported value is economic obsolescence. AASB 136 lists signs that assets may be impaired, including the carrying amount of net assets exceeding market capitalisation and internal evidence that economic performance is worse than expected. A valuer treats these as signs that asset values need testing against earnings.
Highest and best use. The ATO's market valuation guide says market value reflects an asset's highest and best use, which may be its current use or an alternative use. A site or a fleet may be worth more to someone else than to the current business.
Decision table
| Situation | What sets value | Notes |
|---|---|---|
| Earnings well above a fair return on the assets | Earnings | Value exceeds net assets; the difference is goodwill |
| Earnings close to a fair return on the assets | Earnings, close to net assets | Little or no goodwill |
| Earnings below a fair return, assets readily saleable | The higher of the earnings value and orderly realisation of assets, after costs, for a controlling owner | Shortfall against asset values reflects economic obsolescence |
| Losses with no credible recovery | Orderly realisation, after selling and wind-down costs | See valuing a business with negative or volatile earnings |
| Entity that mainly holds property or investments | Net assets at market value | Earnings may be rent or dividends, not trading profit |
| Business owns its freehold premises | Property valued separately; market rent charged against earnings | Avoids counting the property twice |
| Minority interest that cannot force a sale | Earnings or distributions may matter more than realisation | The floor is not usually available to a holder without control |
Worked example: an earnings value below the assets
This example is hypothetical. The figures are round numbers chosen to show the steps.
A contracting company owns a large equipment fleet. A plant valuer puts the fleet at $3,000,000 in continued use. Normal working capital is $200,000. Identifiable net operating assets are therefore $3,200,000.
Normalised earnings, after charging a market rent for the depot, support an earnings-based value of $2,400,000. That is $800,000 below the assets in continued use, so the valuer tests realisation:
| Step | Item | Amount | Running total |
|---|---|---|---|
| 1 | Fleet: orderly realisation value | $2,700,000 | |
| 2 | Less selling costs (auction, transport and agent fees) | -$150,000 | $2,550,000 |
| 3 | Add working capital collected (debtors and stock less creditors) | +$180,000 | $2,730,000 |
| 4 | Less wind-down costs (redundancies, final accounts and other exit costs) | -$130,000 | $2,600,000 |
| Net realisation value | $2,600,000 |
Check: $2,700,000 less $150,000 is $2,550,000; plus $180,000 is $2,730,000; less $130,000 is $2,600,000.
Orderly realisation of the fleet leaves $2,600,000 after costs
- Fleet: orderly realisation value$2,700,000
- Selling costs (auction, transport and agent fees)−$150,000
- Working capital collected (debtors and stock less creditors)+$180,000
- Wind-down costs (redundancies, final accounts and other exit costs)−$130,000
- Net realisation value$2,600,000
Scale starts above zero so the changes are visible. Totals are cut short.
The realisation floor of $2,600,000 sets the value, above the earnings value and below the assets
- Earnings-based value$2,400,000
- Net realisation value$2,600,000
- Identifiable net operating assets in continued use$3,200,000
The realisation value of $2,600,000 exceeds the earnings value of $2,400,000, so for a controlling owner the operating business is worth at least about $2,600,000. It is not worth the $3,200,000 of assets in continued use, because the earnings do not support them. The $800,000 gap between the assets in continued use ($3,200,000) and the earnings value ($2,400,000) is the economic obsolescence. Because orderly realisation yields more than the earnings value, the floor sets the value at $2,600,000, which is $600,000 below the assets in continued use.
Adding freehold property. Suppose the company also owns its depot, valued by a property valuer at $1,500,000. Because the earnings were already charged a market rent, the depot is a separate asset and is added: $2,600,000 plus $1,500,000 gives $4,100,000 before any debt is deducted (if the depot would itself be sold as part of a wind-down, its selling costs and any tax would also come off). If the earnings had been measured with no rent, adding the depot as well would count it twice. Where a property valuation is needed, APAVAL, Valuo's partner brand for property valuations, provides them through apaval.com.au. See also business valuation or property valuation.
From the total, debt and other claims are deducted to reach the value of the shares, as explained in how cash and debt affect a valuation.
Limitations
- The realisation floor assumes someone with control could actually sell the assets. It does not apply in the same way to a minority holding.
- Realisation values depend on market conditions for the specific assets at the valuation date and need specialist evidence for large fleets or specialised plant.
- Wind-down costs, including employee entitlements and lease obligations, can be significant and must be estimated from the actual contracts and payroll.
- Tax on realising assets, such as balancing adjustments or capital gains, is outside this page and should be discussed with the company's tax adviser.
- AASB 136 is a financial reporting standard. It is cited for its logic, not as the basis of a market valuation.
Next steps
- Gather the asset register, finance contracts and any recent plant or property valuations.
- Ask your accountant whether the earnings in the accounts carry a market rent for any premises the business owns.
- If earnings look thin relative to the assets, ask your valuer to test both an earnings value and an orderly realisation value.
- Use the capitalised earnings sensitivity tool to see how far earnings would need to rise to support the asset values.
Questions
Is the book value of my equipment its market value?
Rarely. Book value reflects cost less depreciation for accounting or tax. Market value depends on what a buyer would pay for the item in its condition at the valuation date, which a plant and equipment valuer can assess.
If my business makes a loss, is it worth nothing?
Not necessarily. The assets may still have value if sold. The question is what they would realise in an orderly sale after selling and wind-down costs.
Can a minority shareholder rely on the asset floor?
Less so. A holder who cannot force a sale cannot usually unlock the realisation value, so the value of a minority interest may sit below its share of net assets. That is a valuer's judgement on the facts, not a rule.
Should freehold property be in the business valuation?
It can be included, but it should be valued separately by a property valuer and the earnings should carry a market rent, so the property is not counted twice.
Sources
- AASB 136 Impairment of Assets (compiled, January 2026), Australian Accounting Standards Board. Recoverable amount is the higher of fair value less costs of disposal and value in use; indicators include net assets above market capitalisation and economic performance worse than expected.
- Market valuation for tax purposes, Australian Taxation Office. Market value reflects highest and best use; describes the market, income and cost approaches, including the cost approach for plant within an enterprise value.
- Value your business, business.gov.au. Describes valuing a business from the net worth of its tangible and intangible assets and accounting for depreciation.
Cite or reuse this page
Valuo Insights team (2026). When the assets, not the earnings, set a business's value. Valuo. https://valuo.com.au/insights/valuing-an-asset-heavy-business/ (updated 14 November 2026).
Quote short passages with attribution and a link to this page. Charts and tables created by Valuo may be republished unchanged with the credit "Source: Valuo (valuo.com.au)" and a link. Third-party sources keep their own terms. See the reuse terms.
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.