Company valuation methods

Company valuation methods include relative valuation method and absolute valuation method.

1. Relative valuation method:

1. The relative valuation method is simple and easy to understand, and it is also the most widely used valuation method by investors. In the relative valuation method, commonly used indicators include price-to-earnings ratio (P/E), price-to-book ratio (PB), EV/EBITDA multiple, etc.

2. The calculation formulas of the relative valuation method are as follows: price-to-earnings ratio = price per share/earnings per share; price-to-book ratio = price per share/net assets per share; EV/EBITDA = enterprise value/dividends Earnings before tax, depreciation and amortization.

2. Absolute valuation method:

The dividend discount model and the free cash flow discount model adopt the capitalization pricing method of income, by predicting the company's future dividends or future free cash flow, which is then discounted to arrive at the intrinsic value of the company's stock. The most general form of the dividend discount model is as follows:

1. Among them, V represents the intrinsic value of the stock, D1 represents the dividends available at the end of the first year, and D2 represents the dividends available at the end of the second year. By analogy..., k represents the return on capital/discount rate.

2. If Dt is defined as representing free cash flow, the dividend discount model becomes a free cash flow discount model. Free cash flow refers to the remaining funds after a company's after-tax operating cash flow deducts the additional investment amount during the year.

Discounted cash flow valuation model (DCF)

1. DCF is an absolute valuation method, which is the free cash flow that an asset can generate in the future. Discount according to a reasonable discount rate (WACC) to get the current value of the asset. If the discounted value is higher than the current price of the asset, it is profitable and can be bought. If it is lower than the current price, then It means that the current price is overvalued and needs to be avoided or sold.

2. DCF is a theoretically impeccable valuation model, especially suitable for industries with high cash flow predictability, such as utilities, telecommunications, etc., but it is not suitable for companies with frequent and unpredictable cash flow fluctuations. In stable industries such as the technology industry, the accuracy and credibility of DCF valuation will be reduced.

3. In practical applications, because it is extremely difficult to accurately predict cash flows in the next ten years, DCF is rarely used as the only valuation method to price stocks. The simpler relative valuation Value methods such as price-to-earnings ratios are used more frequently.