How Can I Ace My Company Valuation with A Portfolio?
What Are the Best Company Valuation Methods for My Business?
Owners must grasp not just how much their company is worth today but also what supports and generates that value. This stage is frequently overlooked or minimized, or at the at least, based on poor facts or supposition, due to owner overconfidence or disinterest. In this instance, a valuation frequently serves as a wake-up call for business owners who have a skewed or inaccurate perception of what their company is worth.
Comparable Analysis (“Comps”) Is the First Method.
Comparable company analysis (also known as “trading multiples,” “peer group analysis,” “equity comps,” or “public market multiples”) is a relative valuation report method in which you look at trading multiples like P/E, EV/EBITDA, or other ratios to compare the current value of a company to that of other similar companies. The most prevalent approach of valuation is using multiples of EBITDA.
The “comps” valuation report approach establishes a visible value for the company based on the current market value of similar businesses. Comps are the most popular method since they are simple to compute and always up to date. If company X trades at a 10-times P/E ratio and company Y earns $2.50 per share, company Y’s stock must be worth $25.00 a share, according to the logic (assuming the companies have similar attributes).
Considering Transactions in The Past Is the Second Method
Another type of relative valuation is precedent transactions analysis, which compares the company in question to other businesses in the same industry that has recently been sold or bought. These transaction values include the takeover premium that was included in the purchase price.
The numbers represent a company’s total value. They’re useful for M&A transactions, but they can quickly become out-of-date and no longer reflect the current market. Comps or market trading multiples are more regularly used.