Discounted Cash Flow (DCF) analysis is an intrinsic valuation strategy in which investors estimate the company's free cash flow and reduce the company's actual Weighted Average Capital Cost (WACC).
FREMONT, CA: When evaluating a firm as a going concern, there are three main valuation methods employed by industry practitioners: DCF analysis, relative company analysis, and precedent transactions. These are the most popular valuation approaches for investment finance, market analysis, personal equity, business growth, M&A, Leveraged Buyouts (LBO), and most funding fields.
1. Comparable Analysis (Comps)
Comparable company analysis is the relative evaluation approach by which one can compare the business's current value with other similar firms by considering multiples such as Price-to-Earnings (P/E
), Enterprise Value (EV)/ Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), or other ratios. The most popular valuation method is the EBITDA multiples.
The valuation process 'comps' provides the corporation with an observed value dependent on such similar firms' value. The most often used solution is Comps, which can be measured quickly and still holds current. The logic follows that if the business of company X is in 10 times P/E, and the profits of company Y are 2.50 dollars, the equity of company Y is 25 dollars per share (assuming the firms have similar attributes).
2. Transaction Precedent
Another relative valuation method for a prior transaction analysis is where one equates the business in question with the other firms recently sold or purchased in the same market. These prices include the takeover bonus in the price they were purchased for. The values reflect a company's en bloc worth. It is useful for M&A deals, but over time it can be quickly redundant and no longer represent the present market. It is less common than Comps or multiples of stock pricing.
3. DCF Analysis
Discounted Cash Flow (DCF) analysis is an intrinsic valuation strategy in which investors estimate the company's free cash flow and reduce the company's actual Weighted Average Capital Cost (WACC). The analyzes of DCF are done through the creation of a financial model in excel. The method is the most comprehensive of the three and requires the most predictions and theories. Nevertheless, attempts to prepare a DCF model always lead to the most precise evaluation. A DCF model enables the analyst to predict and even conduct a sensitivity analysis based on various scenarios. For more prominent organizations, the DCF value is typically a description of the components review, which model and add various business units separately.