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0 pointsaaavl28217y ago0 comments

Most of them are based on "comps", a set of comparable companies to the company you're valuing. You then look at financial valuation ratios for those comps, and apply them to the company you're valuing. Commonly, people look at:

* P/E (trailing or forward earnings)

* Enterprise value / EBITDA (trailing or forward)

* Enterprise value / revenue (trailing or forward)

If comparable companies trade at 15x next-twelve months earnings, and the company you're valuing is expected to earn $10M in the next year, you value the company at equity value of $150M.

Enterprise value = total debt of a company + total market value of equity - cash

EBITDA is Earnings before Interest, Taxes Depreciation and Amortization and is a proxy for a business' operating cash flow (as opposed to profits, which are not always the same as cash flows).

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clairity7y ago

comps on ratios at best gives you first-order approximations of valuation, and the assumptions underlying the comp is both fixed snd hidden. DCF is more explicit about its assumptions and you can change as well as bound those assumptions with new information.

sure, it’s more unsettling to have a range than a single number but a range is as close to reality as we’re likely to get with any valuation (unless it’s a well-established company in a stable industry, where DCF can provide a tight answer).

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