The three common approaches of valuing a company are described below:
Discounted Cash Flow (DCF)
It is widely believed that DCF is the best method to estimate the fair value of a company/business. As one would expect, the value of any company is the sum of the cash flows that it produces in the future, discounted to the present at an appropriate rate. The discount rate used is the appropriate Weighted Average Cost of Capital (WACC) that reflects the risk of the cash flows.
Trading Comparables (trading comps)
As per the Efficient Market Hypothesis at any given time, stock prices fully reflect all available information on a particular company and industry. Therefore trading companies provide the best estimate for valuing a similar company. Average multiples such as P/E, EV/EBITDA, EV/Sales, P/B, etc. are calculated from all companies similar to the one being valued and the same used to calculate its enterprise value. Use our free online valuation tool(below) to quickly estimate your company’s worth.
Transaction Comparables (transaction comps)
Investment bankers widely use this method to value a company during an acquisition. Technically this method is similar to trading comps and uses multiples such as P/E, EV/EBITDA, EV/Sales, P/B, etc. But the comparables used are companies which have previously undergone a takeover, rather peers which trade on the stock market. Takeovers generally value the company higher because of a control premium paid by the acquirer.