How to Valuate a Company or Business?
There are 3 Methods you can Valuate a Company or Business.
- Market Valuation.
- Multiplier Method
- Discounted Cash Flow (DCF) Analysis.
Evaluate a Public Traded Firm:
Equity Market Value of a Company = (Price of a Single Share * Number of Outstanding Shares).
In above Method. Market is driven by traders.
Multiplier Method:
Company A
Debt = $100 Million
Annual Sales = $ 180 Million
EBITDA = $70 Million
Earnings: $ 40 Million
Choose 3 or 4 Companies in Same Sector and do the Analysis and Get Financial Statement.
Company Value (Market Capital) Sales EBITDA EARNINGS
1 900 220 115 82
2 700 190 90 60
3 650 280 68 42
4 320 150 45 26
As Per the Multiplier Method
Company Sales Multiples EBITDA Multiples Price to Earnings
1 4.1 7.8 11.0
2 3.7 7.8 11.7
3 2.3 9.6 15.5
4 2.1 7.1 12.3
Avg 3.1 8.1 12.6
Multiplier Method:
Using the A's Sales of 180 Million * 3.1 (Avg Sales of Multiplier) = $558 Million (Enterprise Value) - $100 Million (Net Debt) = $458 Million (Equity Value).
I will be Explaining DCF (Discounted Cash Flow) Method in my next Article.
Thanks,
Mani Nagappan