Industry practitioners employ three basic valuation approaches when assessing a firm as a going concern: (1) DCF analysis, (2) similar company analysis, and (3) precedent transactions. In investment banking, equity research, private equity, corporate development, mergers & acquisitions (M&A), leveraged buyouts (LBO), and most other sectors of finance, these are the most popular techniques of valuation. Check this website diliroom.fr.
What are the Most Common Valuation Techniques?
There are three ways or approaches that may be used to value a business or asset. The Cost Approach considers the cost of rebuilding or replacing an asset. The cost approach method is beneficial for evaluating commercial real estate, new construction, and special use assets. Finance experts seldom use it to determine the worth of a firm that is still operating.
The Market Approach is the next step, which is a type of relative valuation that is widely employed in the business. It covers Precedent Transactions and Comparable Analysis.
Finally, the discounted cash flow (DCF) method is a type of intrinsic valuation that is the most precise and comprehensive approach to valuation modeling. The methodologies utilized in the Market and DCF approaches are described here.
Comparable Analysis (“Comps”) is the first method
Comparable company analysis (also known as “trading multiples,” “peer group analysis,” “equity comps,” or “public market multiples”) is a relative valuation method in which you look at trading multiples like P/E, EV/EBITDA, or other ratios to compare the current value of a company to that of other similar companies. The most prevalent approach of valuing is using multiples of EBITDA.
The “comps” valuation approach offers a visible value for the company based on the current value of similar firms. Comps are the most popular method since they are simple to compute and always up to date. If business X trades at a 10-times P/E ratio and company Y earns $2.50 per share, company Y’s stock must be worth $25.00 a share, according to the logic (assuming the companies have similar attributes).
Method 2: Transactions in the Past
Another type of relative valuation is precedent transactions analysis, which compares the firm in issue to other businesses in the same sector that have previously been sold or bought. These transaction prices include the take-over premium that was included in the purchase price.
The numbers indicate a company’s total value. They’re useful for M&A deals, but they can quickly become out-of-date and no longer reflect the current market. Comps or market trading multiples are more regularly used.
DCF Analysis (method 3)
An analyst estimates the company’ unlevered free cash flow into the future and discounts it back to today.
A DCF analysis is carried out by creating a financial model in Excel, and it necessitates a great deal of data and analysis. It’s the most thorough of the three methods, and it necessitates the most estimates and assumptions. However, the time and work necessary to create a DCF model frequently yields the most accurate value. The analyst can use a DCF model to anticipate value based on several scenarios and even undertake a sensitivity analysis.
The DCF value is frequently a sum-of-the-parts analysis for bigger firms, in which different business units are analyzed independently and summed together. See CFI’s DCF model infographic for more information.
Investment bankers sometimes use a football field graphic to summarize the range of valuations for a company based on the various valuation methodologies.