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Relative valuation compares a stock value to its competitors and peers within the same industry. The main relative valuation ratios include price to free cash flow, enterprisevalue (EV), operating margin, price to sales, and price to earnings. The most popular ratio is the price to earnings ratio.
This evaluation is pivotal because it dictates the terms of investment, directly influencing how much equity (ownership) a founder must relinquish in exchange for funding from the Sharks. Conversely, a lower valuation may require founders to give up more equity.
You may hear Asset Value used in place of Book Value, but this is not precisely correct because Book Value includes not only Asset Value, but also subtracts the value of liabilities of a company. It is typically the highest risk/highest potential return portion of a company’s capital structure.
Analysts use financial metrics and multiples such as Price to Earnings (P/E), Price to Book (P/B), EnterpriseValue to Sales (EV/Sales), EnterpriseValue to EBITDA (EV/EBITDA), and Price to Book (P/B) ratios derived from trading data of similar public companies or deal pricing data of similar M&A transactions.
It considers the company’s cost of equity, cost of debt, and capital structure. c) Calculating Present Value: The projected cash flows are then discounted to their present value using the discount rate. The present values of all projected cash flows are summed to determine the company’s intrinsic value.
It considers the company’s cost of equity, cost of debt, and capital structure. c) Calculating Present Value: The projected cash flows are then discounted to their present value using the discount rate. The present values of all projected cash flows are summed to determine the company’s intrinsic value.
PitchBook: Specializes in private market data, including M&A, private equity, and venture capital transactions. It’s a great resource for understanding the private equity and venture capital landscapes. EBITDA: Earnings before interest, taxes, depreciation, and amortization.
Balance Sheet Forecasts Balance sheet forecasts outline the expected assets, liabilities, and equity of a company at a future date. Market-Based Valuation Market-based valuation methods determine the value of a business by comparing it to similar companies in the market.
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