BUSINESS VALUATION BASED ON COMPANY’S FUNDAMENTALS

Fundamental approach to valuation of business asserts importance of company’s

fundamentals for its valuation. These methods ascertain the company’s value on the basis of
financial information that is relevant to company and its future. This type of valuation is also
called as ‘stand-alone valuation’. The multiple factors that are used in valuation of business
are:

- Revenue or Sales Multiple

- Operating Profit Multiple

- Operating Free Cash Flow Multiple

- Operating Multiple

- Price/Earnings Multiple

- Price/Book Value Multiple

Revenue or Sales multiple

> Revenue or sales multiple reflects value of enterprise in relation to its revenues.

> Revenue multiples are used to calculate both enterprise value and equity value.

> Revenue multiples are generally used for valuation of companies which are not currently
profitable.

Operating Profit Multiple

> EBIDT (Earnings before interest, depreciation and tax) multiple express enterprise value in
relation to cash flow as ascertained from Income statement.

> EBIDT can be easily taken from audited financial statements and it is more stable over
time.
> Use of cash flow in ascertainment of enterprise value is more appropriate, since cash flow
generation capacity will determine enterprise value (EV).

Operating Multiple

> Operational multiples express value of company in relation to a specific operational

activity.

> This method considers revenue generating unit specific to particular industry is considered.

Price/earnings multiple

> Price/earnings (P/E) multiple expresses value of equity in relation to its earnings after tax.

> Stock prices of quoted companies are regularly described in terms of their P/E ratio.

> P/E is inverse of earnings yield, dividing price by earnings.

Price/book value multiple

>Book value multiple reflects market value of equity in relation to company’s book value.

>Book value is adjusted book value of total assets less adjusted book value of liabilities.

>Ratio is called price/book value or P/BV ratio.