There are three main approaches to company valuation: comparable companies analysis, precedent transactions analysis and discounted cash flow (DCF) analysis.
Comparable companies analysis
Comparable companies analysis is based on the idea that similar companies share key financial and operational characteristics, risks and performance drivers. Comparable companies analysis involves selecting peer companies and then compare them and the target based on various financial ratios and key performance indicators. Then, trading multiples are calculated for the peer companies and applied to the target’s relevant financial indicators to come up with a valuation range for the target.
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