Knowledge Base: Valuation Tutorials

Valuation refers to the process of analyzing a company’s financial statements, metrics, market, and other information and determining what the company “should be worth” based on your views.

This value might be a $ per share figure for public companies, or it might be based on the Equity Value or Enterprise Value for private companies without easy-to-determine share prices.

The three main valuation methodologies are comparable public companies (public comps), precedent transactions, and the discounted cash flow (DCF) model, and we have an overview tutorial for each one.

Valuing a company is a bit like valuing a house because you need to use valuation multiples to decide on a reasonable price based on its financial profile, market, and geography.

For example, if a house costs $500,000, you can’t say if it’s “expensive” or “cheap.”

You must look at that price on a $ / square foot or $ / square meter basis and compare it to other, similar houses in the neighborhood to get a sense of the pricing.

If the house is $1,000 / square foot, and other, similar houses in the area are $800 / square foot, it might be too expensive; but if it’s only $600 / square foot, it might be a bargain.

In company valuation, these $ / square foot metrics are valuation multiples, such as Enterprise Value / EBITDA, and they’re critical in this process.

All else being equal, companies with similar sizes, growth rates, and margins in the same industry should trade at similar multiples.

So, if one company trades at 10x EBITDA vs. a median of 13-15x for your set of comparable companies, you may have found an undervalued company (pending additional research).

We present below our tutorials, samples, and excerpts related to company valuation: