Valuation is the process of determining “Value”. It ultimately answers the question “What should I pay” for any asset, instrument or a company.
Valuation can be categorised based on Relative Valuation (using PE ratio of peers) and Intrinsic Valuation (using DCF)
It can also be classified into Asset based Valuation and Earnings Based Valuation (This categorisation is rarely used these days)
There are many techniques used to determine value. An analyst placing a value on a company looks at the company’s management, the composition of its capital structure, the prospect of future earnings and market value of assets.
Techniques
1. Discounted cash flow (DCF) analysis.
2. Comparable transactions method – e.g. If Byju’s with 1 Crores users has raised funding at $10 Bn Valuation, an ed tech startup with 1 Lakh users could be valued at $100 Mn
3. Market valuation – e.g. using PE ratio of a listed peer to value an unlisted company
4. Book value – Never ever use book values for valuation
