📊 1. Overview of Valuation Methods

Valuation is the process of determining the current worth of a business or asset using various methods based on cash flows, market data, or past transactions.

🔹 Common Valuation Approaches:

Each method has strengths and weaknesses, and often analysts use multiple methods to triangulate a value.

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📉 2. Discounted Cash Flow (DCF) Analysis

🔹 What It Is:

DCF values a company by projecting its future free cash flows and discounting them back to present value using a discount rate (typically WACC).

🔹 Key Steps:

1. Project Free Cash Flows (usually 5–10 years)

2. Estimate Terminal Value

   • Perpetuity growth model:

     TV=FCFn+1r−gtext{TV} = frac{text{FCF}_{n+1}}{r – g}TV=r−gFCFn+1​​

   • Exit multiple (e.g., EBITDA × terminal multiple)

3. Discount to Present Value using:

   NPV=∑FCFt(1+r)t+TV(1+r)ntext{NPV} = sum frac{text{FCF}_t}{(1 + r)^t} + frac{text{TV}}{(1 + r)^n}NPV=∑(1+r)tFCFt​​+(1+r)nTV​

4. Calculate Enterprise Value (EV)

🔹 Pros and Cons:

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📊 3. Comparable Company Analysis (Comps)

🔹 What It Is:

Valuation based on market multiples (e.g., EV/EBITDA, P/E) of public companies in the same industry.

🔹 Key Steps:

1. Select a group of comparable companies (similar size, sector, growth).

2. Gather market data:

   • Stock price, market cap, net debt → EV

   • Revenue, EBITDA, EPS, etc.

3. Calculate multiples for each (e.g., EV/EBITDA, P/E).

4. Apply median or average multiple to the target’s metrics.

🔹 Example:

If peers trade at 10× EBITDA and your company’s EBITDA is $5M, then:

$$\text{Enterprise Value}=10\times 5=50M$$

🔹 Pros and Cons:

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🤝 4. Precedent Transactions (Deal Comps)

🔹 What It Is:

Valuation based on prices paid in past M&A deals for similar companies.

🔹 Key Steps:

1. Identify past transactions in the same industry.

2. Collect data:

   • Transaction value, target’s EBITDA, revenue, etc.

3. Calculate deal multiples (e.g., EV/EBITDA).

4. Apply average/multiple to the target’s financials.

🔹 Example:

If similar deals closed at 12× EBITDA, and your company has $4M EBITDA, then:

$$\text{Enterprise Value}=12\times 4=48M$$

🔹 Pros and Cons:

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🧠 5. Choosing the Right Valuation Method

🔹 Analyst Best Practice:

Use multiple methods to arrive at a valuation range rather than a single figure. This improves credibility and allows for triangulation.

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✅ Summary Table