Term · Valuation
Sum-of-the-Parts
In briefThe sum-of-the-parts method values a company's individual business units separately and adds them up, less net debt and holding costs. It suits diversified companies and can show whether the market values valuable segments below their standalone value.
Definition
The sum-of-the-parts (SOTP) valuation determines a company's value by valuing its individual business units or holdings separately and then adding them up. Net debt and holding costs are deducted from the sum. The method is particularly suited to diversified companies with segments of differing profitability.
How it is calculated
Formula. SOTP = Σ segment values − net debt − holding costs
Why it matters for small caps
For small conglomerates, an SOTP can show whether the market values individual valuable segments below the total value (conglomerate discount). It helps make hidden or underestimated parts of the company visible.
Common misreadings
- The added-up individual values are read as an exact fair value, even though they depend heavily on the assumptions for each segment.
In the process
Frequently asked
When is an SOTP valuation useful?
Above all for companies with several different business units or significant holdings that can be valued more easily individually than the company as a whole.
What is a conglomerate discount?
The discount at which the market values a diversified company below the sum of its individual parts, for example due to a lack of transparency or complexity.
Where is the weakness of the method?
It is highly sensitive to assumptions. Each segment valuation requires its own multiples or cash flows, and small changes can strongly shift the overall result.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.