Valuation Methods to Value a Company

Introduction

• Speaker: Kenji
• Objective: Discuss three main methods to value a company.
• Purpose of Valuation:
  • Business transactions (acquisition, selling a department).
  • Individual investment decisions (e.g., buying shares).
  • Applicable to various assets like real estate, software, etc.

Valuation Methods

1. Multiples Based Approach (Market-Based Approach)

• Concept: Comparison using ratios.
• Common Multiples:
  • Price to Earnings (P/E) ratio
  • Enterprise Value over Sales
  • Enterprise Value over EBITDA
• Example:
  • Identify similar companies (industry, geography, size).
  • Calculate P/E ratio and take the average for valuation.
• Limitations:
  • Not applicable if no earnings.
  • Outliers can skew averages.

2. Discounted Cash Flow (DCF)

• Concept: Focuses on intrinsic valuation based on future cash flows.
• Example:
  • Project future cash flows and discount them to present value.
  • Considers the time value of money.
• Discount Rate:
  • Calculated using WACC (Weighted Average Cost of Capital).
• Limitations:
  • Simplified model assumptions.
  • Terminal value calculation needed for business beyond projection period.

3. Cost Approach

• Concept: Value based on replacement cost.
• Application:
  • Common in real estate; calculates cost to replace an asset.
• Formula:
  • Replacement Cost - Depreciation + Value of Land
• Limitations:
  • Difficult to apply to intangibles like software.
  • Regulatory restrictions can affect replacement feasibility.

Pros and Cons of Valuation Methods

Multiples Based Approach

• Pros:
  • Intuitive and easy to apply.
• Cons:
  • Finding truly comparable companies is challenging.

Discounted Cash Flow (DCF)

• Pros:
  • Market-independent, focuses on company's fundamental operations.
• Cons:
  • Time-consuming and heavily reliant on assumptions.

Cost Approach

• Pros:
  • Simple and straightforward.
• Cons:
  • Not always feasible due to variable construction costs and regulations.

Overall Valuation Strategy

• Football Field Valuation:
  • Combines all methods to show a valuation range.
  • Includes 52-week high and low ranges for context.

Conclusion

• Valuation is both an art and a science.
• Analysts seek a valuation range rather than a specific number.
• Future content: Potential in-depth series on each method using case studies.