Valuation Methods | Top 3 Valuation Methods - YouTube

hello everyone hi welcome to the channel of WallStreetmojo friends today we're

going to learn a topic that is what are the valuation methods that one you

know uses when they are valuing your company for M&A for IPO for whatever may

be the reason and for equity valuation for equity research but what are the top

five equity valuation models that you actually should be aware of here's the

list of the methods that have been used discounted cash flow the universal

method come comparable companies or comp valuation comparable transaction that's

called precision transaction method the asset based valuation nav you can say

and there is a sum of parts the discounted cash flow is basically the

present value of the all the cash flow the projected of unlevered free cash

flow it captures the intrinsic value the fair value the comparable company

analysis is the next method it's based on the trading multiples like you know a

EBITDA EV by EBITDA up EV by revenue by sales or EV by cash flow you use the

comparable come you can say the trading multiples and then you take an average

and corporate the same in your company then there is a precedent transaction

whether or comparable transaction method that means the transaction that has

taken place in the past of various companies will be used to value your

company which because those transaction should actually those transaction should

have taken place in the same industry in the same lined up and again the same

metrics can be used the trading multiples can be used for valuing the

company then the next is the asset valuation C based on the fair value of

the it's based basically the fair value of the individual assets Book value may

not be equal to the fair value absolutely that's the most important

thing some of the parts divides the business into separates sub entity or

the parts you cannot say the spin of a spun off but you are divided into parts

they add the value of each part to find out the total value it's like you make

the things in a peaceful and then you value each of them and then you sum it

up so that's how you do so an appropriate valuation method is one

which has the ability to incorporate all the relevant factors for the data that

have material effect that have basically the material effect

on the same and it is the one which has the ability to incorporate all relevant

factors choosing the correct equity valuation method is extremely important

see so one valuing young companies startups with limited history of equity

from the private investor they do not have the past history and are also

suspected to failure so valuing such companies becomes really

difficult and however valuing public you can see public listed suitable companies

you have a lot of financial information available by the way of annual reports

press release and so on and so forth so you need to you need to note that you

know the correct equity valuation method depends on the availability of the data

that's the most important thing and the stage of the development of the target

so the ability of the target is to generate the ability is to generate the

positive for basically the cash flow you can say the positive cash flows so the

first method that we are going to learn is the DCF method that is the discounted

cash flow method here is the example of alibaba's discounted cash flow model

Alibaba is worth with $191.5 billion dollars that's a huge valuation see how

it has been calculated explicit period terminal period and that is the present

value the net present value and then you calculate the enterprise value by and

you add back cash deducted you find the equity value makes it adjustments and

with the help of that finally you will receive the final valuation it just add

equity value of the company so DCF is the net present value NPV of the

projected cash flows by the company DCF is based on you know the principle that

value of a business or asset is basically the intrinsic leave based on

its capacity to generate the cash flows that is the explicit in the terminal

value hence DCF have realized more on the fundamental expectations you can say

that of the business then one public market or factors or the historical

model so it is more of a theoretical in nature you can say that approach

which relies on various assumptions a DCF of analysis helps on yielding the

overall value of a business enterprise value including both the debt and the

equity and you know you need to take care one thing that you know while

calculating the present value of the expected future cash flow is calculated

the disadvantage of this technique is you know estimation estimation of the

future cash flow the next method that you can use for valuation of any company

is the comparable transaction or the compa company valuation now you know this

is the equity valuation method that involves comparing you know operating

metrics and in valuation models of public companies with their target

companies so I'll show you something now this is the list of the comparable

company analyst of box Inc IPOs equity valuation model as you can see couple of

companies that have been taken and the three of the multiples that have been

evaluated and mean and median have been found to evaluate the other details

so but this equity valuation method involves you can say that comparing the

operating metrics and valuation models of the public companies with her with

that of the target companies okay and usually the equity valuation multiple is

the quickest way of valuing a company apart from that it is useful in

comparing the companies that are doing comparable company analysis so the focus

is to capture the forms operating and financial characteristics the next

method that you need to that that actually is going to help you in

valuation is comparable transaction method now when we talk about comparable

transaction method as you can see this is the comparable transaction come of

box IPOs valuation and these are the target this is a acquire and what was

deal size the EV by sales and post that we have incorporated or we have

evaluated the mean what is the highest of the above and what is the lowest of

the above and based on that we'll take the decision see value of the company

using the equity valuation method is estimated by analyzing the price of of

that what has been paid for the similar companies in the similar circumstances

so this kind of valuation method helps in understanding the

multiples you can say the multiples and the premium that has been paid in the

specific industry and how the private market valuations were assessed by the

other parties so this equity valuation of method you requires a familiarity

with the industry and the other assets when choosing the companies for this

type of analysis and one needs to keep in mind that there are similarities

between the factors such as the financial characteristics you can say

that and same industry size of the transaction the type of the transaction

and any traits of the transaction which are the characteristics of the

transaction now the next method of valuation that we should consider is the

asset based valuation now in case of asset based valuation the asset based

valuation method takes into account the value of all the assets and the

liabilities of the business under this approach the value of the business is

equal to the difference between the value of all the relevant assets less

the value of all the relevant liabilities so this can be easily

understood you know with with one example as you can see there is a

liability and assets over here share capital reserves and couple of assets

based on this if we go down we'll see the valuation by using asset approach

you will add all the assets like fixed assets stock debtors cash in hand that has

a total assets and from that you will deduct all the liabilities that is the

creditors bank overdraft and based on which you will get the total liabilities

when you deduct the assets minus the total liabilities you will get the value

of the company which is close enough to a 450000 the last

method that we need to evaluate is the sum of parts valuation model now as a

conglomerate with a diversified business interest may require a totally different

valuation model and we value each business separately remember that thing

and add up the equity valuation so this approach is called the sum of the part

of the valuation method now

it's like you know in order to value the conglomerate like you know mojo one can

use equity valuation but a model to value each segment like automobile

segment evaluation it could be best if we can do that

valuation with the help of EV/EBITDA valuation method if it is this is

the case of automobile ok if it is the case of oil and gas then you can use the

segment that is like EV/EBITDA it as one of one of the way you can

calculate by EV/boe that is an equity value divided by the barrels of

the oil equivalent for software companies you can go some of the

valuation methods like price divided by book value ratio in case of the

E-ecommerce segment you can go for the valuation method like EV/Sales

subscriber ratio EV/multiple and so on and so forth so the major core

total valuation is the for the automobile sector the oil and gas

segment the software segment and the Bank Valuation and the EE-commerce

segment thank you everyone this are the methods

of this are the five methods for valuation