How to Do Valuation of a Company?

Being an investor, business owners and stakeholders, it is necessary to understand the valuation of a company. If you are planning to invest, sell a business, raise capital, or simply analyze your company’s worth, a proper valuation gives you clarity on its financial standing. But what does valuation mean? And how is the process going? 

This blog breaks down the concept and methods that are used in company valuation in detail. So, let’s dive into the topic! 

What is the Valuation of a Company? 

The value of a company means the process of determining the current worth of a business by using objective measures and financial metrics. It gives insight into a company’s value in the market, that considers both tangible and intangible assets.  

If you do valuation of your company will helps in; 

🠖 Selling or acquiring businesses 

🠖 Fundraising 

🠖 Strategic planning and growth analysis 

🠖 Investment decisions 

And remember that the valuation of a company can varies based on the size, purpose, industry and stage of the business.  

Methods to Calculate Valuation of a Company 

There are many commonly used valuation methods that will help to analyze different types of business and situations. Below you can see the top methods in the industry: 

Discounted Cash Flow (DCF) Method

This method estimates a company’s value based on its expected future cash flows, that is discounted to the present value by using a discount rate.  

Formula: 

DCF = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + … + CFn / (1 + r)^n 

Where; 

CF = Cash flow in each year 

R = Discount rate 

N = Number of years 

Comparable Company Analysis (CCA)

It’s also known as “peer comparison”. It will value a company by comparing it with other similar publicly traded companies of the same industry. First you look at key financial rations like; 

🠖 Price-to-Earnings (P/E) 

🠖 Price-to-Sales (P/S) 

🠖 EV/EBITDA (Enterprise Value to EBITDA) 

Then apply these ratios to your target company’s metrics. For example, if your competitor trades at 15x P/E and your company earns ₹10 crore in profit, the estimated value is ₹150 crore. 

Precedent Transactions Method

This method is like Comparable Company Analysis (CCA) but it uses past acquisitions of similar companies as a benchmark. And it is commonly used in M&A negotiations or when planning a company sale.  

If you apply this method, you can get the answer of “what have others paid for similar companies in the past?”.  

Asset-Based Valuation

Here the valuation is based on the company’s total net assets, so you subtract total liabilities from the the total assets.  

Formula: 

Total Assets – Total Liabilities = Value of Equity 

This method is suitable for businesses with significant tangible assets like mining companies, real estate, manufacturing, etc.  

Market Capitalization

This method is easiest and commonly used for publicly traded companies to do valuation of their company. Here is a company’s total value calculated by multiplying the current stock price by the total number of outstanding shares.  

Formula: 

Market Cap = Current Stock Price x Total Outstanding Shares  

Here,  

Current Stock Price = Recent price at a company’s share is trading on the stock market 

Total Outstanding Shares = Total number of shares that are issued by the company  

Revenue or Earnings Multiples

It is considered a quick way to calculate company valuation based on investment or earnings. Revenue and earnings multiples are simple ways to estimate a company’s value. Common revenue-based measures include the Price-to-Sales (P/S) ratio and Enterprise Value to Revenue (EV/Revenue) ratio, which compare the company’s value to its sales.  

Here’s the breakdown: 

Revenue Multiples; 

The Price-to-Sales (P/S) Ratio compares a company’s market capitalization to its total revenue, and is commonly used to evaluate how much investors are willing to pay per unit of revenue. 

The Revenue Multiple, on the other hand, can be calculated in two ways: 

🠖 Revenue Multiple = Enterprise Value (EV) ÷ Revenue 

🠖 Revenue Multiple = Market Capitalization ÷ Revenue (commonly referred to as the P/S ratio) 

Both ratios help assess a company’s valuation based on its revenue, but the EV/Revenue is considered more comprehensive because it includes debt and excludes cash. 

Earnings Multiples; 

The Price-to-Earnings (P/E) ratio compares a company’s market price per share to its earnings per share (EPS) — it is used to evaluate how much investors are willing to pay per ₹1 of earnings. 

Formula: 
P/E Ratio = Price per Share ÷ Earnings per Share 

Startup Valuation Methods

Startup will have lack stable earnings, so you can use alternative methods like; 

Discounted Cash Flow (DCF) Method: 

The method projects future cash flows and discounts them back to their present value; it will determine the company’s worth.  

Formula: DCF = ∑ [CFt / (1 + r)^t] 
 
Where:  

DCF: Discounted Cash Flow 

CFt: is the expected cash flow in period t 

r: is the discount rate (often the WACC) 

t: is the time (e.g., year 1, year 2, etc.) 

∑: represents the summation of all discounted cash flows  

Scorecard Valuation: 

It is used for pre-revenue startups, comparing them to similar companies. 

Formula: Valuation of Startup = [Base Valuation] X [Sum of Factors]  

Pre-money and Post-money Valuation: 

Pre-money valuation of the startup before any new investment and post-money valuation is the new investment amount.  

Formulas: 

Post-Money Valuation = Pre-Money Valuation + Investment Amount  

Pre-Money Valuation = Post-Money Valuation – Investment Amount 

The above startup valuation methods are used based on the market potential, team, product, and business stage.  

Conclusion

The valuation of a company is a crucial step to making informed financial and investment decisions. Whether you are an entrepreneur and seeking funding or an investor evaluating opportunities, you should know how to calculate valuation. Actually, there is no perfect method, the best method depends on the context, industry, and purpose of valuation.  

Knowing what is valuation analysis and applying appropriate techniques to assess your company’s true worth. So, start analyzing company valuations like a pro with Navia’s expert insights. 

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