There are some quantitative methods for company valuation, but the operation process should take into account some qualitative factors, and the traditional financial analysis only provides valuation reference and determines the possible range of company valuation. According to the market and the company's situation, the following valuation methods are widely used:
1. Comparable Company Law
Selecting listed companies in the same industry with non-listed companies that are comparable or comparable to the listed company, and based on the share price and financial data of similar companies, the main financial ratios are calculated, and then these ratios are used as a market price multiplier to deduce the value of the target company, such as P/E ( price/earnings ratio, price/profit), P/S method (price/sales).
Currently in the domestic venture capital (VC) market, the P/E method is a relatively common valuation method. Usually we say there are two kinds of P/E ratios for listed companies:
Historical P/E (Trailing P/E)-that is, the current market capitalization/company's profit in the previous financial year (or the profit in the previous 12 months); forecast P/E (ForwardP/E)-that is, the current market capitalization/company's profit in the current financial year (or the profit in the next 12 months). (or profit for the next 12 months).
Investors are investing in the future of a company, they are giving the current price for the company's future operating ability, so they use the P/E method of valuation is: company value = forecast P/E x company's profit in the next 12 months
The company's profit in the next 12 months can be estimated by the company's financial forecasts, then the biggest problem in valuation is how to determine the forecast P/E ratio The most important question in valuation is how to determine the forecast P/E ratio. Generally speaking, the projected P/E ratio is a discount to the historical P/E ratio, for example, the average historical P/E ratio of an industry on NASDAQ is 40, then the projected P/E ratio is about 30, for the same industry, the same size of the unlisted company, the reference projected P/E ratio needs to be discounted again, 15-20 or so, for the same industry and the smaller start-ups, the reference projected P/E ratio needs to be discounted again, it becomes 7-20 or so. Discount, it becomes 7-10. This is also the current domestic mainstream foreign VC investment is the approximate P/E multiple of the enterprise valuation. For example, if a company predicts that the next year's profit after financing is 1 million dollars, the company's valuation is roughly 7-10 million dollars, if the investor invests 2 million dollars, the company's share is about 20% -35%.
For companies with revenues but no profits, P/E is meaningless, for example, many startups can't realize positive projected profits for many years, so you can use the P/S method to value the company, roughly the same way as the P/E method.
2. Comparable transaction method
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, based on the pricing basis of the financing or merger and acquisition transaction as a reference, from which we can obtain useful financial or non-financial data, and find out some corresponding multipliers for the financing price, and evaluate the target company accordingly.
For example, if Company A has just received financing, and Company B is in the same business area as Company A, and doubles Company A in terms of scale of operations (e.g., revenues), then the investor's valuation of Company B should be about double Company A's valuation. In the case of, for example, Focus Media in the merger and acquisition of Framework Media and Gathering Media respectively, on the one hand, the market parameters of Focus are used as a basis, and on the other hand, the valuation of Framework can be used as a basis for the valuation of Gathering.
The comparable transaction method does not analyze the market value, but only counts the average premium level of the financing M&A price of similar companies, and then calculates the value of the target company with this premium level.
3, 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 startups have a high degree of uncertainty in their projected cash flows, and their discount rates are much higher than those of established companies. The cost of capital for startups seeking seed funding is perhaps in the range of 50-100 percent, 40-60 percent for early stage startups, and 30-50 percent for late stage startups. By contrast, companies with more established business records have a cost of capital of between 10 and 25 percent.
This approach is more applicable to more mature, late-stage private or public companies, such as Carlyle's acquisition of XCMG, which used this valuation method.
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. For example, CNOOC's bid for Unocal valued the company based on its oil reserves.
This method gives the most realistic figures, usually based on the money spent to grow the company. Its shortcomings lie in the assumption that the value is equal to the money used, and investors do not take into account 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.