Valuation
Business valuation methods
A business can be valued from what similar companies sell for or from the cash it will produce; the two answers should be reconciled, not averaged blindly.
Definition
Valuation is the process of estimating what a business is worth. Multiples compare the company with what the market pays for similar businesses, while a discounted cash flow forecasts the cash the business will produce and discounts it at the cost of capital.
Both methods produce a range that reflects the uncertainty in the inputs. The value comes from making the assumptions visible and testing which ones actually move the answer.
Intuition
A multiple is a compressed summary of other people's assumptions. A discounted cash flow is your own assumptions written out in full. Using both tells you whether the market and your model agree about the future.
When to use it
- Buying, selling, or raising capital for a business.
- Testing whether a market price implies plausible growth.
- Comparing a company with its peer group on a consistent basis.
When not to use it
- For a business with no reliable cash flow forecast and no comparable peers.
- Treating a single multiple as a precise answer rather than a range.
Formula
Enterprise value from a multiple
EV = Multiple × Metric
Applies a peer multiple to the company's own metric.
Formula
Equity value bridge
Equity value = Enterprise value − Net debt
Moves from the value of the business to the value of the shares.
Formula
Perpetuity growth value
Value = FCF₁ ÷ (WACC − g)
The value of cash flows growing at a constant rate forever.
- FCF₁
- Free cash flow next year
- WACC
- Weighted average cost of capital
- g
- Growth rate in perpetuity
Worked example
Two estimates of one business
A company earns ৳40,00,000 of EBITDA and has ৳80,00,000 of net debt. A peer trades at 7.5 times EBITDA. Separately, free cash flow next year is ৳25,00,000, the cost of capital is 12%, and growth is 4%.
- 1
Multiple
EV = 7.5 × 40,00,000 = ৳3,00,00,000, so equity is ৳2,20,00,000.
- 2
Discounted cash flow
Value = 25,00,000 ÷ (0.12 − 0.04) = ৳3,12,50,000, so equity is ৳2,32,50,000.
- 3
Reconcile
The two equity estimates differ by about 6%, close enough to cross-check and far enough to investigate.
The business is worth roughly ৳2,20,00,000 to ৳2,32,50,000 of equity, with the difference driven by the growth assumption.
Common mistakes
- Using a terminal growth rate above the long-run growth of the economy.
- Applying a listed peer's multiple to a private, less liquid business without adjustment.
- Subtracting the wrong debt figure when moving from enterprise to equity value.
How it connects
relates to
Useful to study together, in either order.
is an advanced form of
The source extends the target once the basics are secure.