How companies are valued

Every valuation answers one question: what is this business worth, and to whom? Bankers pricing an IPO, analysts writing a buy or sell call, and finance teams testing an acquisition all use the same two families of methods.

• Intrinsic valuation (DCF): value is the present value of the cash the business will generate, discounted at a rate that reflects its risk. It rests on your own forecasts.
• Relative valuation (multiples): value is inferred from what the market pays for similar businesses — for example 9× EBITDA. It rests on the market's current pricing of peers.

Both methods can produce two different values, and confusing them is the most common valuation error:

• Enterprise value (EV) is the value of the operating business to all capital providers — lenders and shareholders together.
• Equity value is what belongs to shareholders only: what is left after the lenders' claim. Divided by the number of shares, it gives a value per share.

Think of a house worth 500 with a mortgage of 300. The house is the enterprise value (500); the owner's equity is 200. The house's value does not change because of how it was financed.

When to use which. A DCF suits businesses whose cash flows can be forecast with reasonable confidence, and it forces you to make every assumption explicit. Multiples are faster, reflect current market sentiment, and are the standard cross-check. In practice analysts use both and present a range.

Match the metric to the claim: EV-based multiples (EV/EBITDA, EV/Sales) compare companies with different debt levels, because EBITDA and sales belong to all capital providers. Equity-based multiples (P/E) pair equity value with net income, which is earned after interest — what shareholders get. For banks and insurers, where debt is part of operations, analysts use equity-based measures.