Valuation Techniques Module 1

03 Valuation Approach

The asset-based valuation is often adjusted to calculate the net asset

value of a company based on the market value of its assets and
liabilities .

1. Cost to build 2. Replacement Cost

2. Market Approach - Relative value

The market approach is a method of determining the value of an

asset based on the selling price of similar assets.

1. Public Company Comparable

Valuation based on the idea that similar public companies share
similar risk and reward characteristics, and therefore should
trade similarly.

2. Precedent Transactions

Valuation based on the acquisition of companies similar to the

target company.

Due to size differences, we scale similar companies by using a

ratio or multiple.

The multiple is usually based on a financial metric (e.g. Revenue,

EBITDA, Earnings Per Share (EPS)).

Sometimes the multiple is based on a capacity factor (e.g. Oil or

Mining Reserves).

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 Valuation Techniques Module 1

03 Valuation Approach

3. Income Approach - Intrinsic Value

Income Approach value a company or the investment based on
the amount of income the company is expected to generate in
the future.
1. Discount Free Cash Flows (DCF)
2. Residual Income (Economic Value Added)

04 Public Company Comparable

Valuation based on the idea that similar public companies share
similar risk and return characteristics, and therefore should trade
similarly.
Analysts express the relationship between the value of a company
and a corresponding performance metric in the form of a valuation
multiple, as shown in the following equation.

Value
= Multiple Metric x Multiple = Value
Metric
The valuation professional must select the most relevant valuation
multiples based on a number of factors including :

Company’s size Profitability Growth prospects Industry

Capital structure

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 Valuation Techniques Module 1

04 Public Company Comparable

Public Company Comparable requires considerable research and

diligence. Access to databases that consolidate public company
information like Bloomberg, Capital IQ .

Screening for Comparable :

In order to learn about the target company, read as much about it as

possible, including sector-specific material.

Sources of data :

Annual & Quarterly reports Investor presentations

Equity & Credit research Earnings conference transcripts

Pay special attention to the conference call Q&A as that gives

you a better idea of what concerns or opportunities research
analysts focus on.

Steps in Performing a Comparable Trading Analysis :

Once we understand the target’s business, we can go through a

comparable company analysis, which consists of 3 steps.
1. Select appropriate peer companies :
This is the most important part of comps modeling.
2. Locate and enter the relevant information into a comps model.

3. Value the ‘target’ company using the selected multiples.

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