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When to Use Price Comparison Valuation Methods

12 Aug When to Use Price Comparison Valuation Methods

Below are a few pointers for utilizing various Price Comparison Ratios when doing a corporate valuation:

Price/Earnings or Price/Gross Cash Flow

Consider using this method when:

  1. Reliable earnings/cash flow data is available for the subject company and comparative companies.”
  2. Current earnings/cash flow are expected to approximate future earnings cash flow.
  3. If valuing ,a controlling interest owners’ benefits can be reasonably estimated. (such benefits include compensation, perquisites, personal expenses paid by company.) , ‘
  4. Earnings/cash now for the subject company and comparative companies is significantly positive (that is, neither negative nor marginally positive).

Price/Revenue Method

Consider using this method when:

  1. Company revenue data is reliable
  2. Some relationship can be established between revenue and profitability among, comparative companies and the company being valued.•
  3. Revenue data is the only reliable income statement data available.
  4. The company has an erratic earnings history.
  5. The subject company is a service business or other business with low variable costs and its industry is undergoing consolidation.
  6. Companies in the industry tend to have similar cost structures.
  7. Either (a) the company being valued pays a dividend directly, or (b) the company pays dividends through excess compensation, and the amount of those assumed dividends can be reasonably estimated.·

Price/Net Asset Valuation Method

Consider using this method when: 

  1. Public information is available for comparative companies’ net asset values.·
  2. Net asset values for both the subject company and comparatives are expected to be significantly positive (that is, not negative or marginally positive).·
  3. A significant portion 01 the company’s assets are composed 01 liquid assets or other investments (such as marketable securities, real estate investments, mineral rights).
  4. The ownership interest being valued is a minority (non-controlling) interest, but the other conditions for using the NAV (Net Asset Value) method are met
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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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