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 

Discounted Cash Flow (DCF) Analysis – Explained Simply

Discounted Cash Flow (DCF) is one of the most widely used methods to calculate the intrinsic value of a company or investment. The basic idea behind DCF is very simple:

Money you receive in the future is worth less than money you have today.

Why? Because today’s money can be invested and earn returns.

The Core Concept

DCF estimates how much a business is worth today based on the cash it is expected to generate in the future.

Instead of looking at current market price, DCF asks a logical question:

If this company generates cash every year in the future, what is that future cash worth today?

To answer this, we do two things:

Estimate future cash flows.

Discount those cash flows back to present value.

Step 1: Estimate Future Cash Flows

First, we forecast how much free cash flow (FCF) the company will generate over the next 5–10 years.

Free Cash Flow means:

Cash generated by the business after paying operating expenses and capital expenditure.

This is the real cash available to investors.

Step 2: Choose a Discount Rate

The discount rate represents the required rate of return. It reflects:

Risk of the business

Cost of capital

Opportunity cost

For companies, analysts often use WACC (Weighted Average Cost of Capital) as the discount rate.

If the risk is high, the discount rate will be high.

Higher discount rate → Lower present value.

Step 3: Calculate Present Value

Each year’s projected cash flow is divided by:

(1 + Discount Rate)^n

Where “n” is the number of years in the future.

After discounting all projected cash flows, we also calculate a terminal value, which estimates business value beyond the forecast period.

Then we add:

Present Value of Cash Flows

Present Value of Terminal Value

This gives the intrinsic value of the company.

Why DCF Is Important

DCF focuses on fundamentals, not market emotions.

It helps investors answer:

Is the stock undervalued?

Is the company worth its current price?

What growth assumptions justify this valuation?

Limitation

DCF is powerful but sensitive to assumptions.

Small changes in growth rate or discount rate can significantly change valuation.

That’s why DCF is not about precision — it’s about logical estimation.

In simple words, DCF tells you what a business is truly worth based on its ability to generate cash in the future, not based on current market hype.

 

           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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