What is the purpose of a sum of the parts (SotP) analysis?

The purpose of a sum of the parts (SotP) analysis is to evaluate each division or business segment of a company separately to determine the total value of the entire company. This approach allows analysts and investors to gain a clearer picture of the value derived from various divisions, especially when a company operates in multiple industries or has diverse product lines.

By assessing each segment's financial performance, growth prospects, and market conditions, SotP offers a more nuanced value assessment that may reveal discrepancies between market capitalization and intrinsic value. For instance, if one division is performing exceptionally well while another is struggling, the SotP analysis helps to break down these performances to arrive at a comprehensive company valuation.

In contrast, options that suggest increasing company debt, simplifying financial reporting, or simply projecting future revenues do not capture the core intent of SotP analysis, which is centered around understanding the individual contributions of different business areas to the overall company value.