How do you value a company?

This question, or variations of it, should be answered by talking about2 primary valuation methodologies:

1. Intrinsic value (discounted cash flow valuation)
2. Relative valuation (comparables/multiples valuation)

• Intrinsic value (DCF) – This approach is the more academically respected approach. The DCF says that the value of a productive asset equals the present value of its cash flows. The answer should run along the line of “project free cash flows for5-20 years, depending on the availability and reliability of information, and then calculate a terminal value.  Discount both the free cash flow projections and terminal value by an appropriate cost of capital (weighted average cost of capital for unlevered DCF and cost of equity for levered DCF).  In an unlevered DCF (the more common approach) this will yield the company’s enterprise value (aka firm and transaction value), from which we need to subtract net debt to arrive at equity value.  Divide equity value by diluted shares outstanding to arrive at equity value per share.
• Relative valuation (Multiples) – The second approach involves determining a comparable peer group – companies that are in the same industry with similar operational, growth, risk, and return on capital characteristics.  Truly identical companies of course do not exist, but you should attempt to find as close to comparable companies as possible. Calculate appropriate industry multiples. Apply the median of these multiples on the relevant operating metric of the target company to arrive at a valuation.  Common multiples are EV/Rev, EV/EBITDA, P/E, P/Book, although some industries place more emphasis on some multiples vs. others, while other industries use different valuation multiples altogether.  It is not a bad idea to research an industry or two (the easiest way is to read an industry report by a sell-side analyst) before the interview to anticipate a follow-up question like “tell me about a particular industry you are interested in and the valuation multiples commonly used.”

Discounting a company's cash flows is the best way to value it since it gives you the intrinsic or core value of the company. This model can be applied on both listed and unlisted companies. Valuation by multiples like P/E is for listed companies. Comparable company valuation will only provide a rough estimate and should be used only when financials are not available

Company Experience in the Market....

Managers and investors alike must understand that accounting numbers are the start, not the end, of business valuation. Asset values and earning power are the dominant factors affecting the valuation of a controlling interest in a business. Market price, which governs valuation of minority interest positions, is of little or no importance in valuing a controlling interest.

we can use the Net Present Value approach where by we look at the current value of the company`s shares in the market

 

Mr. Ihab has expressed his views much in detail. Appreciated.