Company valuation: what is it and what methods exist?

Company valuation is a key process in the financial world that allows determining the real value of a company or business. It is fundamental information for potential buyers and investors as well as for owners, since it allows them to make strategic decisions and to know exactly the value of their company in the face of mergers or acquisitions.

If you want to develop your career in the world of corporate finance, this is one of the processes that you must master. In the Master in Financial Management at Universidad Europea, you will acquire knowledge and tools to carry out company valuations and stand out in financial management and consulting.

What is business valuation and why is it important?

Valuing a company involves analysing its economic and financial situation to establish its market value based on various factors such as its assets, liabilities, revenues and future profits, among others. These analyses allow more informed decisions to be made regarding investments, sale or purchase of companies. In addition, they provide a clear view of the organisation's financial position, which is essential in today's competitive environment.

Company valuation affects several key business processes

• Decision-making: knowing the real value of the organisation allows managers and owners to make strategic decisions based on expansion, investment or divestment projects.
• Investor attraction: having an objective and accurate valuation helps investors decide whether a company is worth investing in.
• Mergers and acquisitions: valuations help to establish fair prices and avoid conflicts between the parties.

Methods for performing a company valuation

There are different methods for valuing a company, each with its own characteristics and applicability depending on the type of company or sector. These are the most important ones

• Discounted cash flow valuation method: this is based on estimating the future cash flows that the company will generate and discounting them to their present value using the corresponding discount rate. It is especially useful for companies with stable and predictable revenues.
• Multiples valuation method: the company's financial multiples, such as the price-earnings ratio (P/E), are compared with those of other similar companies in the market. It is one of the most popular methods because of its simplicity and speed, although it is not always accurate.
• Asset-based valuation method: focuses on the company's balance sheet and the analysis of its assets and liabilities. It is useful for companies that have many physical assets, such as real estate or industrial companies, although it does not always reflect the true value of a growing company.
• Accounting valuation: based on net asset value, i.e. assets minus liabilities. Although it can be simple to apply, it often does not reflect the true market value of the company.

What is the best method for business valuation?

There is no single best method that is applicable to all companies and circumstances. The choice of method depends on factors such as the nature of the company, the industry and the purpose of the valuation. These factors will determine which method is most appropriate in each situation

• Large companies with stable cash flows: the discounted cash flow method is usually the most accurate in these cases, as it allows the value to be assessed according to the ability to generate future income.
• Comparable companies in the market: if there are many similar companies in the market, the multiples method can be a quick and efficient option. This method is often used in sectors such as technology, where valuations are based on quick comparisons.
• Companies with large physical assets: in sectors where physical assets are essential, such as real estate, the asset-based valuation method is the most appropriate, as it allows the value of tangible assets to be known.

In addition, it is also advisable to perform a financial audit to ensure that the data used in the valuation is accurate and up to date. This process gives confidence to both investors and the company's management as to the reliability of the valuation performed.

As you can see, business valuation is an essential tool in the financial field. If you want to work as a CFO or financial consultant, you must know the different methods and their application, something you can learn with specialised training such as the Master in Business Analytics at Universidad Europea. If you prefer a more all-round programme that can open different doors to careers in the business world, you may want to consider the MBA in Madrid or the MBA in Valencia.