Major Valuation Techniques

1) Comparable Companies Valuation Method

This Comparable Companies Valuation Method (Comps) is a relative valuation technique. It values a company by comparing it with similar publicly listed companies.

This method is founded on one simple idea - Similar companies should have almost similar valuation multiples. If companies in the same industry are trading at certain multiples, the target company should be valued in the same range.

Step-by-Step Process by performing valuation through Comparable companies Valuation.

Step 1: Select Comparable Companies which are similar in Industry, Business model, Size and growth, Geography.

For Example - For an IT company, comparable could be Infosys, TCS, and Wipro.

Step 2: Gather Financial Data For each comparable company. Revenue, EBITDA, Net Profit, Market Capitalization, Enterprise Value (EV)

Step 3: In third step Calculate Valuation Multiples. Commonly used multiples are

P/E – Pricing Compared to earnings

EV/EBITDA - Company value compared to operating profit

EV/Sales - Company value compared to revenue of the company

P/B - Market Price compared to book value

Step 4: Find Average or Median of Multiple. Remove extreme values

Median is usually preferred as it is more stable Example:

Example - EV/EBITDA multiples = 12x, 14x, 16x

Median = 14x

Step 5: Value the Target Company

Apply the selected multiple to the target company’s financials.

Example: Target company EBITDA = ₹100 crore

Median EV/EBITDA = 14x

Enterprise Value = ₹1,400 crore

Advantages to use Comparable companies Valuation method

·       Easy to understand 

·       Quick to calculate 

·       Reflects current market pricing

·       Widely used in equity research, IPOs, and M&A

Limitations to use Comparable companies Valuation method  

·       Finding truly similar companies can be difficult 

·       Market may be overvalued or undervalued 

·       Does not fully capture company-specific strengths

When to Use CCV Method?

·       When market data is available 

·       When quick valuation is needed 

·       For peer comparison or IPO pricing

2) Precedent Transactions Valuation Method

This method is also based on simple idea: Precedent Transactions Valuation is a relative valuation method. It values a company by looking at prices paid in past M&A deals for similar companies

If similar companies were bought at certain prices in the past, a similar company today should be valued in the same range. It focuses on actual acquisition deals, not daily stock market prices.

Step-by-Step Process by performing valuation through Precedent Transactions Valuation Method

Step 1: Identify Similar Past Deals.

Select past transactions where Target company was in the same industry, Business model and size were similar & Deal happened recently (to reflect current market)

Example: If valuing a pharma company, look at past pharma acquisitions.

Step 2: Collect Deal Information - For each transaction, collect:

Purchase price, Enterprise Value (EV), Financials of the target at the time of acquisition, Revenue, EBITDA & Net profit

Step 3: Calculate Transaction Multiples

Common multiples used:

EV/EBITDA - Value paid for operating profit

EV/Sales - Value paid for revenue

P/E - Price paid for earnings

Step 4: Find Average or Median Multiple

Remove abnormal deals - Use median multiple for better accuracy

Example:

EV/EBITDA multiples = 10x, 12x, 15x

Median = 12x

Step 5: Value the Target Company

Apply the transaction multiple to the target company’s financials.

Example: Target company EBITDA = ₹80 crore

Median EV/EBITDA = 12x

Enterprise Value = ₹960 crore

Advantages to use Precedent Transactions Valuation Method

·       Based on real deal prices

·       Useful for M&A and takeover valuation

Limitations to use Precedent Transactions Valuation Method

·       Hard to find good and recent deals

·       Old transactions may not reflect current market

·       Deal terms can vary (cash, stock, synergies)

When to Use This Method?

·       In mergers & acquisitions

·       For takeover or buyout valuation

    ·       As a cross-check with DCF and Comps 

3) Discounted Cashflow Analysis Method 

                For DCF method Click on the below link and read the Blog.  

                https://rohitjainsimplefinance.blogspot.com/2025/09/dcf-discounted-cash-flow-method.html

 

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