Valuation and its Types Explained startup.pdf

Hello

1. What is it?
Ft. Finance and Valuation Case Competition
worth 1.5 Lakhs at KMC (DU).
Valuation

2. It is the process of coming at a number
which depicts the true value/worth of a
company or investment or any asset.
It is an analytical approach that has various
approaches to arrive at a fair price of the
asset or company.
During the valuation, all areas of the
business and its departments are
analyzed to determine its worth.
Valuation is very subjective with a lot of
assumptions, It isn’t the purest picture.
1. What is Valuation?
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3. Valuation can be done for numerous
different reasons.
Ex: Predicting worth of the business,
What’s the Enterprise Value, Fair sale price,
Fair acquisition value, Partnership deal,
Statutory purposes and even demerger.
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4. 1) It helps investors to better analyze and
make an informed decisions to Buy/Sell
an investment.
Understanding the fair value of an asset,
investors can assess its pros/cons and
future potential.
2) Companies use valuation to determine
the value of their company which can be
helpful for Raising capital or Making future
Strategic decisions like Merger and
Acquisitions (M&A).
2. Why is it important?
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5. Valuation reports can improve a
business's credibility with different
stakeholders such as investors, lenders,
government, etc.
This also contributes to the long-term
health and growth of a business.
In the world of Investment Banking, You
see a lot of M&A.
Valuation helps in determining a fair
sale/purchase price for both parties
assuring they are getting a reasonable
deal (Hopefully).
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6. 3. Types of Valuation.
A. Relative Valuation:
It is also known as Comparable
companies valuation or Market-based
valuation or Trading comps.
It is used to gauge the value of an asset
by comparing it to the value of similar
companies in the market.
Main crux of the concept behind relative
valuation is that companies/assets with
similar operations, characteristics and risk
profiles should have close values.
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7. Relative valuation is often used when the
future cash flows (FCFF) of an
Investment/Company are uncertain.
OR
If the asset or company is difficult to
value using other methods.
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8. Some ways to perform relative valuation:
1. Price-to-Earnings (P/E) ratio:
It tells us what the market is thinking
about the stock in comparison with its
earning potential.
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P/E Ratio:
Market Share Price (MPS)
Earnings Per Share (EPS)
P/E ratio gives us a metric to gauge
whether our company is overvalued or
undervalued. Startups have PE since
market is looking for a growth future.

9. 2. Price-to-Sales (P/S) Ratio:
Compare the Market price with the Sales
per share. It tells the market‘s valuation for
the sales/share done by the company.
3. Price-to-Book (P/B) Ratio:
It compares the market price with the book
value of the shares.
4. Price-to-Cashflow(P/CF) Ratio:
It compares the market price with the cash
flow per share.
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10. 5. Enterprise Value / EBITDA Ratio:
What is the total value of the company in
times of EBITDA it is generating.
6. Enterprise Value / Sales Ratio:
It compares the market value with the
sales the company. Preferred for loss
making companies.
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11. B. Discounted Cash Flow Valuation:
This is a very widely used method which
tells us about the valuation number based
on the future cash flows.
Also called intrinsic valuation means a
valuation, It is based on the future ability of
the company to generate money.
The idea behind DCF is that value of an
company today is the sum of the present
value of all its future cash flows
discounted at an appropriate discount
rate.
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12. The discount rate (WACC) is a substitute
of the riskiness of the investment.
It shows what the investors whether
creditors or owners expects from the firm
in lieu of their capital and it also reflects the
time value of money
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Present Value:
Future Cash Flows (FCFF)
(1 + Discount Rate) ^ n
The DCF formula:
where:
Present value is the valuation of the
company/asset in today’s time.
FCFF is the future cash flows that the
company will potentially earn.
Discount rate is the expectations of the
capital providers combined.
n is the future number of years.

14. DCF is a powerful and important
methodology in the world of finance for
valuing assets or companies.
DCF is very specific since majority of the
metrics are specifically for that company.
Although valuations can be wrong since a
lot of assumptions are taken for growth
rate and discount rate.
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15. C. Asset Based Valuation:
It is used when the future cash flows of
the asset are uncertain or when other
valuation methods is difficult use.
This approach focuses on the balance
sheet items specifically assets such as
Property, Plant, Inventory, Machinery,
Goodwill, Patents, etc.
It is a method of valuing an asset or
company by arriving at a fair market
value of its underlying asset.
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16. The asset-based valuation process
involves identifying and valuing all of the
assets of the company or asset being
valued.
Once the fair market value for all assets is
determined we reduce the liabilities of the
company to arrive at Net Assets Value
(NAV).
NAV is the value of the company or the
asset.
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