What are the three main valuation methods?
Each method answers the same question from a different angle:
- Discounted cash flow (DCF) – an intrinsic approach. You forecast the company's future free cash flows and discount them back to today, ignoring current market moods. See how a DCF works.
- Comparable companies ("comps") – a relative approach. You value the business off multiples (such as EV/EBITDA) that similar listed companies trade at right now.
- Precedent transactions – also relative, but based on multiples paid in past acquisitions. These usually include a control premium, so they tend to sit above trading comps.
Which method should you use?
Analysts rarely pick one. DCF gives a fundamental anchor but is sensitive to assumptions; comps tell you what the market will actually pay today; precedent transactions show what an acquirer might pay. When all three cluster in a similar range, you can be confident. When they diverge, the gap itself is informative – it usually means the market is pricing in growth or risk your DCF assumptions do not capture.
| Method | Type | Best for |
|---|---|---|
| DCF | Intrinsic | Stable, cash-generative businesses |
| Comparables | Relative | Pricing vs the market today; high-growth firms |
| Precedent transactions | Relative | A business being sold (includes control premium) |
Enterprise value vs equity value: what is the difference?
This trips up almost everyone. Enterprise value (EV) is the value of the whole business regardless of how it is financed – what you would pay to own the operations outright. Equity value is what belongs to shareholders after debt is repaid. The bridge is simple:
Equity value = Enterprise value − Net debt
A DCF of the whole firm produces an enterprise value; to get a share price you subtract net debt and divide by the share count. Mixing these two up is the most common valuation error there is.
Worked example: the three methods side by side
Take a company with EBITDA of $200m and net debt of $300m.
The three land between $2,000m and $2,400m – a tight range that gives you confidence. Taking the DCF's $2,100m EV and subtracting $300m of net debt leaves an equity value of $1,800m. Across 120m shares, that is about $15 per share.
What this means for you
A credible valuation is not about precision – it is about honesty over assumptions. Small changes in the discount rate or growth rate can swing a DCF by 30% or more, which is why professionals quote a range and run sensitivities rather than defend a single decimal. Anchor with a DCF, sanity-check it against comparables and precedent transactions, and treat a wide gap between methods as a question to investigate, not a number to average away.