The Various Ways to Value a Company

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This is the first post in a series about company valuation. We’ll start by exploring the different methods to value a company and then dive deeper into each one.

Method 1: The Discounted Cash Flow (DCF) Method

The DCF method views the company as a cash flow machine. Here’s how it works:

  1. Forecast the Cash Flow: Project the company’s future cash flows.
  2. Discount the Cash Flow: Apply the WACC (Weighted Average Cost of Capital) to discount the projected cash flows.
  3. Sum the Discounted Cash Flows: Sum these discounted cash flows over a specific period to determine the Enterprise Value.

If you’re unfamiliar with WACC, don’t worry—we’ll cover it in more detail later.

This will give you the Enterprise Value. If you want the Equity Value, you will need to substract the Net Debt (which is Debt – Cash and cash equivalents).

Equity Value = Enterprise Value - Net Debt

Method 2: The Multiple Method

This method involves comparing the company to others, either with historical purchase of companies known to the public or with publicly traded companies:

  1. Find Comparable Companies: Look for publicly known historical purchases or publicly traded companies.
  2. Determine Multiples: Calculate the Enterprise Value of these companies (Equity Value + Net Debt), then derive an EBITDA or EBIT multiple.
  3. Apply the Multiple: Use this multiple to compute the Enterprise Value for the company in question.
  4. Calculate Equity Value: Subtract the Net Debt from the Enterprise Value to get the Equity Value.

Method 3: The Balance Sheet Approach

For companies that don’t generate significant cash, their value might lie in their assets:

  1. Assess Assets: Evaluate the market value of the company’s assets, including brands, tangible assets, intangible assets, patents, or shares in other companies.
  2. Sum the Asset Values: Add up the market value of all assets.
  3. Subtract Liabilities: Subtract the total liabilities from the sum of the asset values to get the company’s value.

We won’t delve deeply into this method as it heavily depends on the specific company and the market value of its assets.

Divergent Results

When valuing a company using the DCF and Multiple methods, you might get different results. It’s crucial to understand why there are discrepancies rather than just averaging the outcomes from both methods.

Stay tuned for more detailed posts on each valuation method!