Financial valuation refers to the assessment of the objective value of a company, financial asset or project. This evaluation is crucial in various situations, including fundraising, mergers and acquisitions, divestitures, and other business combinations. It relies on multiple approaches depending on the context. Here are some commonly used methods:
- Comparable companies’ method: This method involves valuing a company or asset, including intangible assets, by comparing it to similar transactions that have already occurred. Financial multiples such as the price-to-earnings ratio (P/E) or the price-to-book ratio (P/B) are analysed.
- Discounted Cash Flow (DCF) method: This method estimates the future cash flows generated by the company or asset, including intangible assets, and then discounts them to their present value using an appropriate discount rate.
- Net asset value method: This method estimates the value of the company by subtracting its liabilities from the value of its assets. It can be suitable for companies whose primary value lies in their tangible assets.
- Earnings multiplier method: This method estimates a company’s value by applying a multiple to its adjusted earnings. This method is often used to value publicly traded companies.
Each method has its advantages and limitations, and the choice of method depends on the specific context of the valuation as well as the availability and quality of data. A combined approach using multiple methods to validate the results is sometimes preferred to obtain a well-founded evaluation.