Valuation guide
Company valuation methods, explained
Valuers look at a company through more than one approach and combine the results. Here is how.
The three approaches
- 01Income approachValues the company by its future free cash flows, discounted to today.Read the guide
- 02Market approachValues the company by the multiples at which similar companies are priced.Read the guide
- 03Cost approachValues the company by its assets at current cost or market value, less liabilities.Read the guide
What is a company valuation?
An estimate of what a business or its shares are worth on a given date, for a stated purpose such as a sale or a funding round.
It depends on the data and the valuer's judgement, so a report states its purpose, date and key assumptions.
The three approaches at a glance
Each approach answers a different question.
| Approach | Core question | Best suited to | Main inputs |
|---|---|---|---|
| Income approach | Core questionWhat are the future cash flows worth today? | Best suited toCompanies with forecasts you can defend | Main inputsForecast cash flows, a discount rate, a terminal value |
| Market approach | Core questionWhat are similar companies worth? | Best suited toSectors with listed peers or recent deals | Main inputsComparables' multiples and the company's figures |
| Cost approach | Core questionWhat are the net assets worth? | Best suited toAsset-heavy and holding companies | Main inputsAsset list, costs, depreciation, liabilities |
How to choose an approach
Common starting points; the final choice is the valuer's.
- A growing company with reliable forecasts
- Income, checked against market
- An established company with comparable peers
- Market and income together
- An asset-heavy or holding company
- Cost: net asset value
- An early company with little revenue
- Income with a required return, and cost as a floor
From several values to one conclusion
Each approach gives a value. The valuer weights them by how reliable their inputs are, and the final value is the weighted average.
The report shows the weights and each approach's contribution.
| Approach | Weight | Value | Contribution |
|---|---|---|---|
| Income approach | 50% | 23.40 | 11.70 |
| Market approach | 30% | 21.00 | 6.30 |
| Cost approach | 20% | 11.40 | 2.28 |
| Final value | 20.28 | ||
Enterprise value or equity value?
Most income and market methods give an enterprise value: the business's value to all capital providers. Subtracting net debt gives the equity value.
The price-to-earnings multiple gives an equity value directly.
Glossary
- Enterprise value
- The value of a company's operations to all capital providers, before subtracting net debt.
- Equity value
- The value that belongs to shareholders: enterprise value less net debt.
- Net debt
- Interest-bearing debt minus cash, taken from the latest historical balance sheet.
- Free cash flow
- Cash generated after taxes, capital expenditure and changes in working capital, available to all capital providers.
- WACC
- Weighted average cost of capital: the blended return required by lenders and shareholders, weighted by their share of capital.
- Terminal value
- The value of all cash flows after the forecast period, from a perpetual growth rate or an exit multiple.
- Valuation multiple
- A ratio such as EV/EBITDA or P/E, taken from comparable companies and applied to the company's own figures.
- Basis of value
- The definition of value the report uses, such as market value or fair value, stated in the engagement.
Common questions
None in every case. Each is reliable when its inputs are, which is why valuers combine approaches.
Usually two or more, so each result can be checked against another.
No. It does the calculations and the layout. The inputs, weights and opinion are the valuer's.
This guide explains general valuation practice and how TaqeemTech applies it. It is not investment, legal or tax advice. The valuation opinion belongs to the firm and the valuer who approve the report.
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