Definition
Sum-of-the-Parts Valuation (SOTP)
Sum-of-the-parts valuation values a diversified company by valuing each business segment separately and adding them, often used for conglomerates and holding companies.
SOTP recognises that a single multiple cannot fairly value a company with very different businesses. Each division is valued using the method and multiple appropriate to its sector, then summed, with adjustments for net debt and a holding company discount where relevant.
SOTP relies heavily on segment reporting for the underlying numbers. It is widely used for Indian conglomerates and holding companies, where the market often values the whole below the sum of its listed stakes, the so-called holding-company discount.
Related terms
- Enterprise Value (EV)Enterprise value is the total value of a business, its market cap plus debt minus cash, representing the cost to acquire the whole company.
- Consolidated vs Standalone FinancialsStandalone financials cover only the parent company, while consolidated financials combine the parent with its subsidiaries, joint ventures and associates.
- Segment ReportingSegment reporting breaks down a company's revenue, profit and assets by business line or geography, helping investors see how each part performs.
- Holding Company DiscountA holding company discount is the gap by which a holding company's market value trades below the value of its underlying investments and stakes.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.