Asset Valuation Techniques

Choosing the Right Valuation Method: A Practical Guide This decision tree covers all the main valuation methods in one diagram. Understanding when and how to apply the right valuation approach is essential for anyone in finance, investing, or corporate strategy. Across investment memos, fundraising decks, and strategic planning sessions, three valuation techniques appear time and again: 1. Discounted Cash Flow (DCF) DCF focuses on estimating a company’s intrinsic worth. You forecast future cash flows and discount them to present value using an appropriate discount rate. This method is most reliable when the business generates steady, foreseeable cash flows and when you have a solid grasp of its risk profile and growth trajectory. 2. Comparable Company Analysis (Comps) This approach benchmarks your company against publicly traded peers using valuation multiples like EV/EBITDA or P/E. It's a quick, market-driven way to assess value and is commonly used to validate other methods. However, its effectiveness depends on finding truly comparable companies. 3. Precedent Transactions By examining past acquisitions of similar companies, this method gives insight into what real buyers were willing to pay. It’s especially useful in mergers and acquisitions but can be skewed by factors such as deal-specific synergies, timing, or macro conditions. How to Decide Which Valuation Method to Use Enter the Valuation Decision Tree, a structured way to select the most appropriate method based on your company’s fundamentals: Is the business expected to continue operating? Is it more than just an asset-holding entity? Does it generate commercial goodwill? If you can confidently answer “yes” to all three, you're typically choosing between Income-based (like DCF) and Market-based (like Comps and Precedents) methodologies—illustrated at the bottom of the decision framework. This kind of structured approach is invaluable for financial analysts, corporate development teams, and anyone making valuation-based decisions. For a deeper dive, explore our courses at Corporate Finance Institute® (CFI).

I have been building Valuation Models for 18 years! Some key points that I have learnt along the way.. Try these to improve your analysis significantly! ✅ Always understand the business before approaching valuation. This will form the core of your valuation model assumptions. - What does the company do? - How does it make money - What is the value chain? - Are their any competitive advantages that it has? ✅ Check for the financials. - Pick out annual reports, Punch in the data for last 4-5 years, and calculate ratios - Look at all major numbers and find out what they are. Other expenses are large - check what they are. Provisions in Balance Sheet are large - check them. - Look for trends in numbers and ratios - Are margins increasing, decreasing, or constant. Is working capital cycle moving around? Any other trends worth noticing? - Why are these happening? Try and identify what are the key reasons ✅ Projections - Project financials. Build a completely linked valuation model. - Whether you are doing DCF, or Relative Valuation - it is good to get a sense of how projected financials would look like. - The Balance sheet should link completely and the model should be dynamic. The model is NOT COMPLETE without this. - If you change assumptions - it should flow cleanly and the Balance Sheet should remain balanced ✅ Valuation - This comes last. Choose the appropriate method - FCFE, FCFF, Relative Valuation, SOTP. If not sure, try more than one method - Focus on the business. You can do a sensitivity on the discount rate, but it is usually difficult to do that on the business. - It is ok to be uncertain about the final price you get. But you need to know the relationship between business parameters like volume / pricing / costs and the valuation Learning Valuation Modeling is a process. Key is to keep practising and reading on the business. Try this the next time you are building a valuation model. ----- I help people build a #career in #valuation and #investmentbanking through my writing and courses. Follow me (Peeyush Chitlangia, CFA) to stay tuned for future posts.

If you are preparing for careers in Investment Banking, Valuations, Corporate Finance or Equity Research, one question you can’t escape in interviews is: “How do you value a company?” The most popular method - DCF (Discounted Cash Flow).  Let’s simplify it step by step. How to Value a Company Using DCF (Discounted Cash Flow) 👉 Step 1: Forecast Free Cash Flows (FCF) Think of FCF as the cash left after all expenses, taxes, and investments – the amount available to both debt and equity holders. Formula: FCF = EBIT(1 - Tax) + Depreciation - Capex - ΔWorking Capital Usually projected for 5-10 years. The more realistic your assumptions, the better your valuation. 👉 Step 2: Calculate Terminal Value (TV) Since companies don’t stop after 10 years, we need to capture the value beyond projections. Two approaches: Perpetuity Growth Method: TV = FCF (n+1) / (WACC - g) (g is long-term growth rate, usually linked to GDP growth or inflation.) Exit Multiple Method: Apply an EV/EBITDA multiple to the last projected EBITDA. 👉 Step 3: Discount to Present Value Now, bring future cash flows back to today. Formula: DCF Value = Σ [FCFt / (1+WACC)^t] + TV / (1+WACC)^n Here, WACC = Weighted Average Cost of Capital, the blended return expected by both debt and equity investors. 👉 Step 4: Get Enterprise Value & Equity Value DCF gives Enterprise Value (EV). Equity Value = EV - Net Debt (Debt - Cash). Divide by number of shares - Intrinsic Value per Share. 👉 How to Interpret If DCF Value > Current Market Price - Stock looks undervalued. If DCF Value < Current Market Price - Stock looks overvalued. 👉 Common Mistakes to Avoid Overestimating growth and underestimating risk. Using an unrealistic discount rate. Ignoring working capital changes. Blindly applying exit multiples without industry context. ✅ That’s DCF in a nutshell. If you can explain this in clear, simple words, you’ll impress any interviewer. 👉 Like if this made DCF easier for you. 👉 Comment your doubts or interview tips on valuation. 👉 Repost to help your friends preparing for finance roles. 👉 Follow Yogesh Jangid for more such insights on #finance #business #investing & #markets #CorporateFinance #InvestmentBanking #Valuation #FinancialModeling

Many founders get blindsided during valuation discussions. They walk into investor meetings with a number in mind. But they can't defend it. Here's the reality... Investors don't use just one method to value your startup. They use multiple approaches based on your stage, traction, and market. Understanding these 8 methods puts you in control of the conversation. For Pre-Revenue Startups ☑️ The Berkus Method breaks your startup into 5 categories. Your idea, team strength, product progress, market readiness, and strategic relationships. Each gets up to $500K. Add them up for your valuation. ☑️Scorecard Valuation starts with local market averages. Then adjusts up or down based on how you compare to other funded startups in key areas like team quality and market size. ☑️Risk Factor Summation takes a base valuation and adjusts it across 12 risk categories. Strong team? Add $250K. Intense competition? Subtract $250K. For Revenue-Generating Startups ✅ Comparable Transactions looks at recent deals for similar companies. If SaaS startups at your stage get 8x revenue multiples, that becomes your baseline. ✅Discounted Cash Flow projects your future cash flows and discounts them to today's value. Higher risk means higher discount rates and lower valuations. ✅Venture Capital Method works backward from your projected exit. If VCs want 10x returns and see a $100M exit, they need to invest at a $10M valuation. Universal Methods 🔵Cost-to-Duplicate estimates what it would cost to rebuild your startup from scratch. This often becomes the valuation floor. 🔵Book Value simply subtracts liabilities from assets. Rarely used for high-growth startups but relevant for asset-heavy businesses. Don't rely on one method. Triangulate using 2-3 approaches that fit your stage. A pre-seed startup might blend Berkus, Scorecard, and Risk Factor. A Series A company could use Comparable Transactions, light DCF, and the VC Method. Valuation isn't just about the number. It's about showing you understand how investors think. When you can speak their language, negotiations become conversations. And conversations lead to better outcomes. --- Follow me (Nidhi Kaushal) for more fundraising insights that actually work. DM me or click the link in my bio to book a 1:1 call and discuss your fundraising strategy 📞

In the domain of financial analysis, the reliance on Earnings Per Share (EPS) and Price-to-Earnings (P/E) ratios as primary tools for company valuation is being critically reexamined. My latest article dives into the complexities of financial valuation, challenging the conventional wisdom and advocating for a paradigm shift towards a more comprehensive analysis. Key Highlights: - Fundamental Valuation Principle: I delve into the concept that true business value is rooted in the present value of expected future free cash flows, moving beyond mere current earnings or market prices. - Case Studies of Microsoft and The Coca-Cola Company: I analyse the financials of these companies to illuminate the discrepancies between reported earnings and actual cash flows, showcasing the impact of investment requirements and the necessity for a holistic financial understanding. - Limitations of EPS and P/E Ratios: I explore how these popular metrics, while useful, fall short in accurately representing aspects like growth potential, risk, and capital intensity. They also fail to encapsulate qualitative factors like management quality and competitive advantage. - Accounting Conventions vs. Economic Reality: The article sheds light on the divergence between accounting practices and the actual economic health of a company, especially in the context of revenue recognition, merger accounting, inventory valuation, and deferred taxes. - Insights and Implications: The analysis underscores a central misalignment in financial analysis – the gap between widely accepted valuation principles and the prevalent use of EPS and P/E ratios. It highlights the need for a more nuanced approach to valuation, considering various accounting methods and their impact on perceived financial health. The article concludes with a call to action for investors and analysts to adopt a more sophisticated approach to financial analysis. This approach should account for the interplay of earnings, cash flows, and broader economic factors, ensuring a more accurate assessment of a company's true value. #FinancialAnalysis #Valuation #InvestmentStrategy #EPS #PEratios #CashFlow #Microsoft #CocaCola #AccountingPractices #EconomicReality #FinancialHealth

When do you switch from earnings-based to asset-based valuation methods? Most valuation starts with earnings. Multiples, cash flows, DCF models. But sometimes, the income statement is not the best lens. Here is when you step back and let the balance sheet take over: 1. When the business is no longer a going concern - If operations are winding down or liquidity is under stress, future earnings lose relevance. - In distressed cases, liquidation value or net asset value becomes the core of the valuation. 2. When the business is asset-rich but income-poor - A company might own land, real estate, or investments that do not show up in earnings. - If the market is undervaluing those assets, a book-value-based approach helps uncover hidden value. 3. When historical earnings are volatile or unreliable - If cash flows are inconsistent, driven by one-offs, or subject to manipulation, you cannot rely on multiples. - Asset-based valuation provides a floor when the income stream cannot be trusted. 4. When the business is in early-stage or pre-revenue phase - Startups or R&D-heavy businesses often have limited or negative earnings. - In such cases, the value is in the assets like patents, IP, capitalized costs, not the income statement. 5. When the assets are more valuable than the operations - Sometimes the operating business is loss-making, but the underlying assets like brands, land, inventory can be monetized at a premium. - Here, asset-based valuation gives you the realizable value, not the accounting one. Earnings-based methods work when future cash flows are predictable. Asset-based methods take over when earnings lose their signaling power. Follow Pratik S for Investment Banking Careers and Education

Appraising a business isn't just about applying an EBITDA multiple and calling it a day. Each piece of the puzzle can materially affect the valuation. If you're doing FP&A advisory work, or serving as a Fractional CFO, clients will often benefit from a valuation model. The model doesn't need to be perfect, but it serves a couple of purposes: 𝟭) 𝗗𝘆𝗻𝗮𝗺𝗶𝗰 𝗩𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 𝗕𝗮𝘀𝗲𝗱 𝗼𝗻 𝗥𝗲𝗮𝗹 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗣𝗲𝗿𝗳𝗼𝗿𝗺𝗮𝗻𝗰𝗲 Instead of relying on a static, one-off valuation, an integrated 3-statement model allows you to automatically refresh the appraisal as actual financial results (income statement, balance sheet, and cash flow) evolve. The model will recalculate the company's value in real time as revenue, margins, working capital, or capex change. 𝟮) 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼 𝗣𝗹𝗮𝗻𝗻𝗶𝗻𝗴 𝗮𝗻𝗱 𝗪𝗵𝗮𝘁 𝗜𝗳𝘀 When the valuation is tied to full financial statement forecasts, you can easily run "what if" scenarios: How does a price increase or cost savings initiative affect the valuation? What happens if growth slows? By integrating assumptions into the model, you can help a business owner understand how these decisions impact value. 𝗪𝗵𝗮𝘁'𝘀 𝗵𝗮𝗽𝗽𝗲𝗻𝗶𝗻𝗴 𝗶𝗻 𝘁𝗵𝗶𝘀 𝗲𝘅𝗮𝗺𝗽𝗹𝗲? In this analysis, loosely based upon a real company (I’ve changed the figures and assumptions), I use both an NTM Revenue Multiple and an NTM EBITDA Multiple. NTM stands for next twelve months. That's why it's vital to have a 3-statement forecast model behind this analysis. For illustrative purposes, I weighted the two different approaches 50/50 to reduce reliance on a single method. However, it may be concerning that the gap between the indicated value of equity before adjustments ($31.5 million and $84.9 million) is so wide between the revenue and EBITDA multiples. This is why selecting the right market multiples and the right basis for the multiple matters so much. Rely on a questionable multiple or basis and you’ll end up be with a questionable valuation. The value may need to be adjusted for a control premium, recognizing that buyers often pay a premium to gain strategic decision-making power. The result: A marketable, controlling value of $83.2 million. 𝗪𝗵𝗲𝗻 𝘆𝗼𝘂'𝗿𝗲 𝗯𝘂𝗶𝗹𝗱𝗶𝗻𝗴 𝗱𝘆𝗻𝗮𝗺𝗶𝗰 𝗺𝗼𝗱𝗲𝗹𝘀 𝗮𝗻𝗱 𝘃𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻𝘀 𝗳𝗼𝗿 𝗰𝗹𝗶𝗲𝗻𝘁𝘀, 𝗮𝗹𝘄𝗮𝘆𝘀 𝗿𝗲𝗺𝗲𝗺𝗯𝗲𝗿: (1) Different methodologies can lead to very different results. (2) Adjustments for control can move the needle dramatically. (3) A valuation isn't just a number. It’s a combination of judgement and assumptions. You can have two different Fractional CFOs who arrive at two different outcomes. That's why it's helpful to make integrated financial models flexible, so they can update and be adjusted with relative ease. These models help give business owners a reasonable basis for the worth of their companies. They deserve that.

Over the past couple of weeks, I've been working through the Financial Modeling World Cup cases which typically showcase some classic financial modelling problems. Even if you've got no intention of competing, these cases are always interesting. In this episode released today, we tackle a classic valuation problem by recreating a discounted cash flow (DCF) model based on a PDF attachment received via email. Using Power Query in Excel, we walk through extracting data, building assumptions, and running different scenarios to determine valuation based on various changes such as discount rate and cost of goods sold (COGS). We also deal with some circular references, avoid using Tables (I never thought I'd say THAT!), turns on gridlines and make use of Focus Cell. PLUS, how to tell when you’ve got your answer completely WRONG! https://lnkd.in/gBXEbgMU #FinancialModelling #DCF #DCFValuation #FMWCWalkthrough

Valuing an early stage start-up isn’t an exact science—it’s more of an art form! Had a great discussion with the team today about how to value a startup—a critical step for securing funding, making equity decisions, and setting a strategy. In our work supporting clients raising investment, we often encounter the unique challenges of valuing startups, especially in the early stages when financials are limited. But getting this right is essential—it sets the foundation for funding conversations. We focused on three key methods that bring structure to the process: 1️⃣ VC Method: A favourite for investors—estimate the potential exit value and work backwards to determine today’s valuation. 2️⃣ Revenue Multiples (EV/R): Benchmarks revenue compared to similar companies—helpful when there’s some revenue to work with. 3️⃣ Comparables: Look at startups with similar profiles to use their valuations as a guide. More complex methods like EBITDA multiples, EV/R, and DCF come into play when the company is profitable or further along the lifecycle curve. EBITDA multiples can be relevant, but startups often don’t have the steady profits needed to apply this effectively. DCF (Discounted Cash Flow) is even trickier—it relies heavily on accurate forecasts, which are hard to pin down for early-stage businesses. The simpler approaches (like Berkus Method or Balance Scorecard) can be helpful, but they lack the rigour required for serious investment conversations. Understanding which method applies and when—and getting guidance from someone who knows this space. Valuation isn’t just about crunching numbers—it’s about applying the right framework to the right context. 🚀 #StartupValuation #Entrepreneurship #RaisingCapital #VC #Investment #Newableadvice

💡 How Do You Value a Business? It Depends on What You're Really Trying to See. As a CFO, I get asked this question all the time: “What’s this business worth?” My answer? It depends on the method, the assumptions, and the purpose. Because business valuation isn’t just a technical exercise. It’s a lens. And each lens gives you a different angle. In my latest guide, I’ve broken down the five most widely used valuation methods and when each one matters most: 🧮 1. Discounted Cash Flow (DCF) This method gives you the intrinsic value based on future free cash flows. It’s powerful but also sensitive to assumptions. Miss the WACC or terminal growth rate, and the whole model skews. ✅ Best for: Long-term investors who believe in the fundamentals ⚠️ Watch out for: Overconfidence in your forecast 📊 2. Comparable Company Analysis (CCA) This one is about market mood. You look at peers, ratios like EV/EBITDA or P/E, and ask: What are similar businesses worth today? ✅ Best for: Fast benchmarking and market-aligned estimates ⚠️ Watch out for: Differences in business models or risk profiles 🤝 3. Precedent Transaction Analysis (PTA) Here, we look at recent M&A deals to benchmark value. Think of it as a real-world yardstick. ✅ Best for: Negotiating in M&A scenarios ⚠️ Watch out for: Unique deal terms or outdated data 🏗️ 4. Asset-Based Valuation Strip away the forecasts and trends. This approach values the net assets, which are what you own minus what you owe. ✅ Best for: Asset-heavy businesses or liquidation scenarios ⚠️ Watch out for: Undervalued intangibles and obsolete assets 🧠 5. Real Options Valuation This is the most advanced and strategic approach. It values flexibility in your decisions based on how the future plays out. ✅ Best for: High-risk, high-reward projects with optionality ⚠️ Watch out for: Overengineering a model based on hypotheticals ✅ The best valuation method? It depends on the question you’re trying to answer. Are you selling? Investing? Raising capital? Planning for growth? Each scenario deserves a tailored lens. 📥 Download the full guide to see a practical breakdown of each method, including pros, cons, and where I’ve seen them applied effectively. 💬 What valuation method do you rely on most, and why? #CFOInsights #BusinessValuation #DCF #ComparableCompanies #MergersAndAcquisitions #StrategicFinance #ExecutiveLeadership #CorporateValuation