Valuation Methods | Banklytech

Approaches

Core Valuation Techniques

Select a methodology to learn about its principles, applications, and implementation.

Discounted Cash Flow Analysis

The DCF method estimates the value of an investment based on its expected future cash flows, adjusted for the time value of money.

Key Components:

Projection of free cash flows (FCF)
Determination of discount rate (WACC)
Calculation of terminal value
Present value computation

When to Use:

Companies with predictable cash flows
When intrinsic value is more important than market comparables
For valuing entire businesses or specific projects

DCF Formula:

Value = Σ [FCF_t / (1 + r)^t] + [TV / (1 + r)ⁿ]

Advantages:

Fundamentally sound approach
Flexible for different growth scenarios
Not dependent on market comparables

Limitations:

Sensitive to assumptions (growth rates, discount rates)
Difficult for companies with unpredictable cash flows
Terminal value often represents large portion of total value

Comparable Companies Analysis

This method values a company by comparing it to similar businesses based on valuation multiples.

Key Components:

Selection of appropriate peer group
Calculation of relevant multiples (P/E, EV/EBITDA, etc.)
Normalization of financial metrics
Application of multiples to subject company

When to Use:

When there are sufficient comparable public companies
For market-relative valuations
Quick sanity checks on other valuation methods

Common Multiples:

Price-to-Earnings (P/E)

Market Cap / Net Income

EV/EBITDA

Enterprise Value / EBITDA

Price-to-Book (P/B)

Market Cap / Book Value

EV/Sales

Enterprise Value / Revenue

Advantages:

Market-based and current
Relatively simple to understand
Widely used and accepted

Limitations:

Difficult to find perfect comparables
Market multiples may be distorted
Doesn't account for unique company characteristics

Precedent Transactions Analysis

This approach values a company based on the prices paid for similar companies in past M&A transactions.

Key Components:

Identification of relevant transactions
Analysis of deal terms and premiums paid
Calculation of transaction multiples
Application to subject company

When to Use:

For M&A valuations
When assessing potential acquisition targets
To determine control premiums

Transaction Multiples:

EV/EBITDA

Most common transaction multiple

Price/Earnings

For profitable companies

EV/Revenue

For high-growth companies

Price/Book

For asset-heavy businesses

Advantages:

Real-world transaction data
Includes control premiums
Reflects strategic value

Limitations:

Limited data availability
Transactions may not be comparable
Market conditions may have changed

Asset-Based Valuation

This method values a company based on the net value of its assets after subtracting liabilities.

Key Components:

Identification and valuation of all assets
Assessment of liabilities
Adjustment to fair market value (not book value)
Consideration of intangible assets

When to Use:

For asset-heavy businesses
In liquidation scenarios
When earnings are volatile or negative

Approaches:

Going Concern

Assets valued for continued use in business

Liquidation Value

Assets valued in forced sale scenario

Replacement Cost

Cost to recreate the business

Advantages:

Tangible foundation based on assets
Useful for certain industries (real estate, manufacturing)
Provides floor value

Limitations:

Doesn't account for earning power
May undervalue intangible assets
Difficult to value specialized assets

Method	Best For	Strengths	Weaknesses	Complexity
DCF	Companies with predictable cash flows	Fundamental, flexible, forward-looking	Sensitive to assumptions	High
Comparables	Public companies with peers	Market-based, simple, current	Need good comparables	Medium
Transactions	M&A valuations	Real transaction data, includes premiums	Limited data availability	Medium
Asset-Based	Asset-heavy businesses	Tangible, floor value	Ignores earning power	Low-Medium

Valuation
Methodologies

Approaches

Discounted Cash Flow Analysis

Key Components:

When to Use:

DCF Formula:

Advantages:

Limitations:

Comparable Companies Analysis

Key Components:

When to Use:

Common Multiples:

Advantages:

Limitations:

Precedent Transactions Analysis

Key Components:

When to Use:

Transaction Multiples:

Advantages:

Limitations:

Asset-Based Valuation

Key Components:

When to Use:

Approaches:

Advantages:

Limitations:

Comparison

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ValuationMethodologies

Approaches

Discounted Cash Flow Analysis

Key Components:

When to Use:

DCF Formula:

Advantages:

Limitations:

Comparable Companies Analysis

Key Components:

When to Use:

Common Multiples:

Advantages:

Limitations:

Precedent Transactions Analysis

Key Components:

When to Use:

Transaction Multiples:

Advantages:

Limitations:

Asset-Based Valuation

Key Components:

When to Use:

Approaches:

Advantages:

Limitations:

Comparison

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Valuation
Methodologies