Company Valuation: Beginner's Guide

By admin on Sun May 04 2025

Whether you're an aspiring investor, startup founder, or finance student, understanding how to value a company is essential. But valuation isn’t just a number—it’s a lens through which we understand a company’s worth, risk, and potential. In this post, we’ll demystify valuation by walking through Enterprise Value, Equity Value, and the most common valuation methods.

Step 1: Understand the Two Pillars — Equity Value vs. Enterprise Value

Before you dive into models or market comps, it’s important to distinguish between the two key concepts:

Equity Value (a.k.a. Market Capitalization)

This is what shareholders own. It's simply:

$ Equity Value = Share Price × Number of Outstanding Shares $ It represents the market value of the company’s equity only—not its debt or cash.

Enterprise Value (EV)

Enterprise Value is a more comprehensive measure of a firm’s total value. It represents the value of the entire business, regardless of its capital structure:

$ Enterprise Value = Equity Value + Total Debt + Minority Interest + Preferred Stock – Cash & Cash Equivalents $

Why subtract cash? Because if you were to acquire the company, you'd effectively get that cash, reducing your net cost.

Step 2: Know Your Valuation Methods

Now that we understand what we’re valuing, let’s talk about how to value a company. These are the three most common approaches used in finance:

Comparable Company Analysis (Comps)

This method compares the company to similar businesses using valuation multiples like:

EV/EBITDA: Enterprise Value divided by EBITDA (proxy for cash flow)

P/E Ratio: Share price divided by earnings per share

Best for: Quick benchmark valuation using public data.

Example: If similar companies trade at 10× EBITDA, and your target company has $100M in EBITDA:

$ Enterprise Value = 10 × $100M = $1B $

Precedent Transactions

This method looks at recent M&A deals of similar companies and the multiples they were acquired at.

Best for: Valuing private companies or takeover scenarios.

Note: Premiums are usually added, since acquirers often pay above market price to gain control.

Discounted Cash Flow (DCF) Analysis

This method projects a company’s future free cash flows and discounts them back to present value using a discount rate (WACC).

Best for: Intrinsic valuation based on company fundamentals.

Steps:

  1. Forecast 5–10 years of FCF

  2. Calculate Terminal Value (either using perpetuity growth or exit multiple)

  3. Discount all cash flows to present value

Formula:

$ DCF Value = ∑ (FCF / (1 + WACC)^t ) + Terminal Value / (1 + WACC)^n $

Step 3: Bring It All Together — From EV to Share Price

Once you have Enterprise Value, you can calculate the implied share price:

$ Equity Value = Enterprise Value – Net Debt $ $ Share Price = Equity Value / Shares Outstanding $

Key Considerations & Adjustments

  • Industry Norms: SaaS startups use revenue multiples; mature industrials use EBITDA or EBIT.

  • Capital Structure: For highly leveraged firms, EV is more informative than Equity Value.

  • Profitability: For unprofitable startups, use revenue multiples carefully and supplement with qualitative factors.