Evaluating a Company: the 3 Methods

Avaliar uma Empresa os 3 Métodos
Blog / Financial Literacy

Evaluating a Company: the 3 Methods

If you are familiar with real estate appraisals, transitioning to business is relatively simple. The reasoning is the same. However, the valuation of a company has a much greater range of complexity than that of a property. It can be considerably simpler, just as it can be a high-precision, very complex exercise, correctly designed exclusively by professionals.

Income/Cash Flow Method

Income methodology introduces the perspective of
– future income
– time value of money

A valuation using future flows measures the intrinsic value of the company. It presents an absolute reference of value that the company represents for capital holders.

The methods that exist are:
– Discounting future dividends;
– Discounting free cash flows for the company;
– Discounting free cash flows for shareholders;< br />- EVA;
– Discount of residual income for shareholders.

The most common and used method (because it is the most robust) is the method of discounting free cash flows for the company.

Evaluation through Multiples

Transposing, again, to the real estate market, it is possible to value a house by assigning it a relative value when compared, with a group of similar houses already valued. Retaining what the theoretical principles are, it is reasonable to say that the exercise of extracting the value of a house by the sea by multiplying its m2 by the average value of m2 of similar houses, is the same as valuing an oil producer using a metric relative value that evaluates it within a group of similar companies. In their genesis, the starting and ending points of both exercises are the same. However, what happens along the way is different, since companies and homes are very different assets.

The methods that exist are:
– Valuation using multiples between comparable companies.
– Valuation using multiples between comparable transactions.

Evaluation Settlement Method

So far, both methods presented make a very relevant assumption: the company will work for an indefinite period of time. In reality things are not quite like that, according to the Bank of Portugal the average life expectancy of a company in Portugal is 10 years. No one wants to believe that their company will survive for such a short time, but There are no arguments against facts.

This method, on the other hand, values ​​the company assuming that there will be no future operating cash flows produced by this entity, as it has existed up to that point. We value all assets on one side at market values, all liabilities on the other, equally at market values. We subtract the liabilities from the assets and we have the residual value that belongs to the shareholders in this scenario.

Here the reasoning is: “If I liquidated all my assets and all my debts tomorrow, how much money would I have left?”

To learn more about these methods and how to prepare a valuation of your company, we encourage the reader to contact an analyst at ValuingTools.

Who can prepare company valuations accurately? Someone who has the following characteristics:
– Strong knowledge of financial modeling;
– Good academic foundations (Master’s degree in Finance from a prestigious college and having the CFA are good indicators);
– Experience in assessments working in a corporate finance department. It will be through experience that an appraiser will be able to analyze the reasonableness of the values ​​that emerge;
– Strong knowledge of financial markets and the world economy (especially monetary policy);
– Strong accounting knowledge (IFRS and US GAAP) ;
– Ability to understand different industries and curiosity to research;

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