With the development of the market economy, enterprises participate in economic activities, the emergence of the valuation of enterprises. Enterprises in the market in the characteristics of the industry, the stage of enterprise development, the market environment and a variety of other uncertainties, the enterprise valuation methods are not the same. Enterprise valuation is a prerequisite for investment, financing and trading. The logic of enterprise valuation is that "value determines price". The valuation methods of listed companies are usually divided into two categories: one is the relative valuation method; the other is the absolute valuation method. The valuation method of non-listed companies can be divided into three categories: market method; income method; asset method.
I. Valuation methods for listed companies
1. Relative valuation method: Relative valuation method is simple and easy to understand, and it is also the most widely used valuation method by investors. In the relative valuation method, the commonly used indicators are price/earnings ratio (P/E), price/net worth ratio (PB), EV/EBITDA multiples, etc., and their calculation formulas are as follows:
P/E ratio=Price per share/Earnings per share
P/E ratio=Price per share/Net worth per share
EV/EBITDA=Enterprise value/Earnings before interest, taxes, depreciation and amortization (EBITDA) Earnings
(where: enterprise value is the sum of the total market value of a company's stock and the value of its interest-bearing debt, less cash and short-term investments)
The multiples derived from the use of relative valuation methods are used to compare the relative valuation levels of companies in different industries and within an industry; the values of the indicators for companies in different industries are not directly comparable, and the differences between them can be significant. When using relative valuation indicators to analyze the value of the company, it is necessary to combine the macro-economy, industry development and the company's fundamentals, company-specific analysis. The advantage of the relative valuation method is that it is simple and easy to be grasped by ordinary investors, and it also reveals the market's evaluation of the company's value. However, when there are large fluctuations in the macro-economy, the relative valuation models such as price-earnings ratios and price-net ratios of cyclical industries may also have relatively large variations, which may be misleading to the assessment of the value of the company. In this case, the combined use of relative and absolute valuation models can effectively reduce the bias of valuation conclusions.
2. Absolute valuation method: The discounted dividend model and discounted free cash flow model use the capitalization of income pricing method, by predicting the company's future dividends or future free cash flow, and then discounting it to get the intrinsic value of the company's stock. Compared with the relative valuation method, the absolute valuation method has the advantage of being able to reveal the intrinsic value of a company's stock more accurately, but it is more difficult to choose the parameters correctly. Deviations in the forecast of future dividends and cash flows, and deviations in the selection of the discount rate may affect the accuracy of the valuation.
II. Valuation Methods for Unlisted Companies
1. Comparable Company Method of Market Approach: First of all, we should select the listed companies which are comparable or referable in the same industry with the unlisted companies, and calculate the main financial ratios based on the share price and financial data of the similar companies, and then use these ratios as the market price multiplier to infer the value of the target company, for example, P/E (price-earnings ratio, price/profit), P/S method ( Price/Sales). In the domestic venture capital (VC) market, the P/E method is the more common valuation method.
There are two types of P/E ratios that we usually refer to for listed companies:
Historical P/E - i.e., current market capitalization/company's profit for the previous financial year (or for the previous 12 months).
Forecast P/E ratio - i.e. current market capitalization/company's profit for the current financial year (or profit for the next 12 months).
Investors are investing in the future of a company, they use the P/E method of valuation is:
Company value = forecast P/E x company's profit in the next 12 months
For companies that have revenues but no profits, P/E is meaningless, for example, many start-ups can not achieve a positive forecast for profits for many years, then you can use the P/S method of valuation, the The general method is the same as the P/E method.
2. Comparable Transaction Market Approach: Select companies in the same industry as the startup, which have been invested in or merged and acquired during a suitable period of time prior to the valuation, and based on the pricing basis of SME financing or M&A transactions as a reference, obtain useful financial or non-financial data from them, and find out some corresponding SME financing price multipliers, accordingly assess the target company.
The comparable transaction method does not analyze the market value, but only counts the average premium level of SME financing M&A prices of similar companies, and then uses this premium level to calculate the value of the target company.
3. Income method of discounted cash flow: This is a more mature valuation method, through the prediction of the company's future free cash flow, the cost of capital, the company's future free cash flow discounting, the company's value that is the present value of future cash flow. The discount rate is the most effective way to deal with the risk of forecasting, as there is a great deal of uncertainty in the projected cash flows of startups, which are discounted at a much higher rate than those of mature companies. The cost of capital for startups seeking seed funding is perhaps in the range of 50%-100%, for early stage startups it is 40%-60%, and for late stage startups it is 30%-50%. By contrast, companies with more established operating records have a cost of capital of between 10-25 percent.
4. Asset Approach: The asset approach assumes that a prudent investor would not pay more than the cost of acquiring assets of the same utility as the target company. This method gives the most realistic figures and is usually based on the money spent on the development of the company. Its shortcomings lie in the assumption that the value is equal to the money used and the investor does not consider all the intangible values associated with the company's operations. In addition, the asset approach does not take into account the value of future projected economic returns. Therefore, the asset approach values the company and results in the lowest possible value.