Definition
SOTP analysis values conglomerates or diversified companies by valuing each business unit independently using appropriate multiples, then summing them. It helps identify conglomerate discounts where the whole trades below the sum of parts.
Formula
SOTP Value = Σ(Segment Value) - Corporate Overhead - Net Debt
Example
A conglomerate has: Tech division worth $5B (at 20x EBITDA), Retail worth $2B (at 8x), Industrial worth $3B (at 10x). SOTP = $10B, but market cap is $8B (20% conglomerate discount).
FAQ
What is Sum-of-the-Parts Valuation (SOTP)?
Valuation method that values each business segment separately.
How do you calculate Sum-of-the-Parts Valuation (SOTP)?
A common formula for Sum-of-the-Parts Valuation (SOTP) is: SOTP Value = Σ(Segment Value) - Corporate Overhead - Net Debt
Why is Sum-of-the-Parts Valuation (SOTP) important?
Sum-of-the-Parts Valuation (SOTP) helps investors evaluate valuation and make more informed decisions.