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Valuation Methods
There is no single way to assign value to a company. This page is intended to help inform you of the most commonly used valuation methods- their pros, cons, and helpful comparisons between the methods. Click on the 'Discounted Cash Flow' and 'Net Asset Value/ Net Book Value' links to help calculate the value of your company!
The Discounted Cash Flow (DCF) method is a valuation approach that determines a company’s worth based on the present value of its expected future cash flows. These cash flows are typically derived from the company’s projected revenues minus operating expenses, taxes, changes in working capital, and capital expenditures—essentially the free cash flow available to investors. By discounting these projected free cash flows back at a rate reflecting the company’s risk and cost of capital, analysts arrive at an estimate of the company’s intrinsic value.
The Net Book Value (NBV) method is a valuation approach that estimates a company’s worth based on the value of its assets recorded on the balance sheet, minus liabilities. This figure reflects the historical cost of assets adjusted for depreciation, amortization, and impairment, rather than their current market value. Because it is rooted in accounting values, the NBV method provides a straightforward measure of equity but may not capture the company’s true earning potential or intangible assets.
Comparable Company Analysis
The Comparable Company Analysis (Comps) method values a business by comparing it to similar publicly traded companies. Key financial metrics—such as price-to-earnings (P/E), enterprise value-to-EBITDA (EV/EBITDA), or revenue multiples—are used to benchmark the company’s performance and derive an implied valuation range. This approach reflects current market sentiment and relative positioning but can be influenced by short-term market fluctuations and the choice of peer group.
Market Capitalization
The Market Capitalization method values a publicly traded company by multiplying its current share price by the total number of outstanding shares. It provides a straightforward, real-time measure of how the equity market values the business. However, it does not account for debt, cash, or other balance sheet items, making it a limited measure of overall enterprise value.
EBITDA Multiples
The EBITDA multiples method values a company by comparing its earnings before interest, taxes, depreciation, and amortization (EBITDA) to the valuation multiples observed in similar businesses. By applying an industry-appropriate multiple (such as EV/EBITDA) to the company’s EBITDA, analysts estimate its enterprise value. This approach is widely used because it provides a quick, market-based benchmark, though it relies heavily on selecting accurate peers and relevant multiples.