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How do casinos in Nevada get valued?

Investors in Las Vegas use numerous methods to value the biggest casinos in Sin City. Read this simple guide to find out more

In the business word, there are two popular ways of valuing a publicly listed company. You can multiply its current stock price by the number of all shares. Or you can check its market capitalization. Either way, you get the same figure.

Still, valuing a large business is easier said than done. That’s why investors in Las Vegas use numerous methods to value the biggest casinos in Sin City. To be clear, here’s a guide showing the most successful casinos in Clark County.

Map of Casinos in Nevada

The folks at Casinos US have a Nevada casino map showing the best establishments in Las Vegas and where to find them. They also break down companies based on size, ratings, and whether Indian-owned or commercial businesses.

According to the websites, there are 345 casinos in Nevada. Many of them are cluttered in the six-kilometer stretch known as the strip. However, there’s also a handful of establishment located downturn. And there are more casinos scattered throughout Clark County.

That said, here’s how investors value casinos in Nevada.

1—Asset Based Valuation

This is the traditional way of valuing businesses. You estimate the fair value of assets and liabilities. Then you subtract the cost of clearing liabilities from the value of assets to get the estimated value of a company.

Although a popular way of valuing businesses, asset-based valuation is seldom used in Las Vegas. That’s because the true value of casinos is more related to their revenue and cash flow than their assets.

Nonetheless, some casino entrepreneurs still use asset valuation to gauge the profitability of a business. Naturally, the most successful casinos have plenty of high-value assets and few or no liabilities.

2—Income-Based Approach

Income-based valuation is a common approach for valuing consistently profitable casinos. It’s particularly effective when the company involved has been in operation for years or decades. Basically, it involves estimating a casino’s cash flow in one year and dividing its capitalization rate—net income divided by estimated value of its assets.

Also known as the Discounted Cash Flow Method (DCF), the income-based way of valuing casinos is a tad complicated. That’s because there’s more than one way of doing it. As mentioned earlier, you can forecast a casino’s cash flow in the future.

But it requires that you consider competition, customer base, prices, volume and the overall economy. Then you have to combine it with capital assets and current revenue. In other words, it takes a lot of maths. But it’s effective.

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3—Valuation through Stock Prices

If you want to get a rough estimate of the value of a publicly traded company, use this formula. Multiply the value of its stock price by the number of available shares. Let’s say a casino has 20 million shares. And each share costs $10. Its estimated value is $200 million.

Analytical firm Macro Trends uses this formula to calculate the value of popular casinos around the world daily. At the time of writing, here’s the valuation of five renowned American gambling businesses:

  • Las Vegas Sands--$42 billion
  • MGM Resorts--$12 billion
  • Penn National Gaming--$10 billion
  • Wynn Resorts--$9 billion
  • Churchill Downsorporated--$7 billion

Although stock price valuation provides an estimate of a company’s worth, it does not tell the entire story. Instead, it shows you the perceived value. Think of Tesla’s inflated stock prices. They are incredibly high even though the company could be worth less than some of its competitors.

4—Relative Valuation

With this approach, investors derive the value of a casino by comparing it to a similar company whose value is known. This valuation method often involves multiplying several financial ratios between two or more companies:

While it involves a substantial amount of calculations, relative valuation is fairly easy. And that’s why many investors use it before they value a casino through other models.

  • Price to earnings
  • Price to sales
  • Price to book value
  • Enterprise Value to earnings before interest, tax, depreciation and amortization

For clarity, the ratios mentioned above all lead to important financial elements. For example, price to earnings help investors determine a company’s equity value. On the flip side, price to book value helps get the value of a company whose worth is mainly reliant on its assets.

Of course, the companies being compared must offer close services and have many similarities. You can’t compare a newly established business with a casino founded fifty years ago. The businesses must be similar in various ways.

Cash Flow Approach to Lifespan

This method works by calculating the amount of cash flow available to share holders since the business started. It’s effective in valuing new casinos with high growth rates and established casinos with slow growth rates.

Let’s say a casino has $50 million in cash available to equity holders. And it has been around for ten years. Some investors might say its estimated value is $500 million. However, many of them also use additional systems to get a more accurate figure.

The reason why cash flow to lifespan doesn’t provide accurate values is that you need to adjust for future changes in cash flows. A casino could have $50 million today and $30 million a year later. As such, calculating its value based on past records doesn’t make a lot of sense.

Performance Metrics Valuation

Many casinos provide a variety of services: gaming floors, lodgings, spas, swimming pools, concert halls, restaurants and bars. Against that backdrop, you can get an estimate of a business’ value by calculating the performance of its different departments.

In other words, this approach is related to the income valuation method but it breaks down different services. For example, it estimates the hotel villa occupancy rate, the average revenue per user and customer lifetime value

An investor could use as many metrics as they want. The objective is to breakdown a company’s sources of income to find out the exact amount it makes from various products. After that, you can calculate the value of its assets less liabilities and taxes to get its fair value.