Financial valuation is the assessment of the objective value of a company, financial asset, or project. This assessment is essential in many situations, such as fundraising, mergers and acquisitions, disposals, company backing, or other partnerships. It can involve a variety of approaches depending on the context.
The most commonly used methods are as follows:
- Comparable method: This involves valuing the company or asset, including intangible assets, by analyzing similar past transactions. Financial multiples are examined, such as the price/earnings ratio (PER) and the price/book value ratio.
- Discounted cash flow (DCF) method: This method estimates the future cash flows generated by the company or asset under review, including intangible assets; these cash flows are discounted to their present value using a reasonable and appropriate discount rate.
- Net asset method: This method estimates the value of the company by deducting its liabilities from the value of its assets. It may be appropriate for companies whose main value lies in their tangible assets.
- Earnings premium method: This method assesses a company’s value by applying a multiple to its adjusted earnings. It is often used for publicly traded companies.
Each method has its strengths and limitations, and the choice of method depends on the specific context of the valuation and the availability and quality of data. In some cases, a combined approach that compares several methods to validate results may be preferable to reach a more substantiated value.