What are company Valuation techniques? Describe main 5 techniques in brief.

What is financial modelling

When you work in a research company or Investment bank, as an analyst you will be working on these valuation techniques every day. Generally models will be already available for valuation. Analyst will only be updating data in those models and valuation of company will automatically come on “Output Sheet” with the help of formulas & functions. Here in this article, we are giving just a theoretical overview of these techniques.

Following are the various company Valuation techniques, you will be working on.
  1. Discounted Cash Flow (DCF) Valuation
  2. Relative Valuation
  3. Transaction Valuation
  4. Sum of total parts valuation
  5. Leverage Buyout Valuation
Below you see a basic introduction about all above techniques.
  1. Discounted Cash Flow Valuation:

    This is fundamental technique of valuation which is based on the principle that the value of an asset will depend on the expected cash flows which the asset will generate in future.

    Similarly the value of company will depend on all cash flows which the company will generate in the foreseeable future. DCF valuation gives the intrinsic value of the company which is equal to present value of those cash flows.

    Assuming other factors constant, higher cash flows will give higher intrinsic value and lower cash flows will lower intrinsic value.

  1. Relative Valuation (Trading combs, peer group analysis, public market multiples):

    This technique is based on the principle that similar asset should have similar value. So similar companies should have similar price.

    In this technique, the value is derived based on the multiples of comparable companies. There are two types of multiples: Equity Multiples & Enterprise Value Multiples.

    Equity Multiples:                   P/E , P/BV, P/ CF, P/ Sales

    Enterprise Value Multiples: EV / Revenue, EV / EBIT, EV/ EBITDA, EV / Cash Flows

  1. Transaction Valuation (Transaction comps, deal comps)

    In this technique, the value of a focus company is derived based on the multiples of comparable acquired companies in the recent past in the same sector and domain of focus Company.

    Here the difference between, Relative valuation & Transaction valuation is companies. In RV you are considering current multiples of companies which have not been acquired where as in TV you are looking at historical multiples of those companies which have been acquired.

    There are offer price (Equity) multiples and transaction value multiples:

    Offer Price / Sales, Offer Price / EPS, Offer Price /  CF, Offer Price / BV

    Transaction Value / Sales, Transaction Value / EBIT , Transaction Value / EBITDA, Transaction Value / Cash Flows

  1. Sum of total Parts ( SOTP, Breakup analysis):As the name suggests, in this technique the value of company is derived by adding the individual value of each segment or product or asset. In this technique, first the value of each segment is derived based on other techniques like DCF, RV, TV and then all values are added to arrive at the total value of the firm.
  1. LBO Analysis:LBO technique is used when we are considering to buy a company by taking debt of approximately 75%. Value is based on debt repayment and return on equity investment.


Best of luck.

Manoj Kumar

Senior Faculty

Investment Banking Institute

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