Comps, precedents and DCF: the three valuation methods
“How would you value a company?”
It's an open question that reveals whether you see valuation as a range built from several methods, each with strengths and blind spots.
Two relative methods (what similar companies trade at, and what buyers paid for similar companies) plus one intrinsic method (the DCF), shown side by side as ranges.
Comparable companies (trading comps)
Find public companies that look like the target in industry, size, growth and margins, and see what the market pays for them: EV/EBITDA, P/E and so on. Apply those multiples to the target. It reflects today's market, but only for minority stakes, with no control premium.
Precedent transactions
Look at what acquirers paid for similar companies in past deals. Buyers pay for control and synergies, so precedents usually come out highest. The catch: deals can be old, done in different markets, and thinly disclosed.
DCF
Value the company on its own projected cash flows. It doesn't depend on whether the market is rational, but it depends heavily on assumptions. It can land anywhere: highest, lowest or in between.
- 1Comps trade at 8–10x EBITDA → $960–1,200 of EV.
- 2Precedents paid 10–12x → $1,200–1,440.
- 3The DCF (with sensitivities) gives $1,050–1,350.
Dashed: cash flow that year. Filled: what it's worth today. The further out, the more it shrinks.
Try dragging WACC and watch EV.
Show judgment, not just the list: “For a stable industrial with good peers I'd lean on comps; for a high-growth company with no profits I'd use revenue multiples and treat the DCF with caution.”
These ranges are drawn as horizontal bars on a football field chart, often alongside the 52-week trading range and an LBO analysis showing what a financial sponsor could afford to pay.
Say it like this
I'd use three main methods. Comparable companies show what the market currently pays for similar public companies. Precedent transactions show what acquirers paid for similar companies, including a control premium, so they often come out highest. A DCF values the company on its own projected cash flows. I'd show the ranges side by side on a football field and explain which methods I'd weight most for this particular company.
Traps to avoid
- ✕Naming the methods but never saying which you'd trust for the company in question.
- ✕Claiming the DCF is always the highest or lowest. It depends on assumptions.
- ✕Forgetting that comps reflect minority stakes and precedents include a control premium.
What they'll ask next
›Which method usually gives the highest value?
Precedent transactions, because of the control premium, though a DCF with aggressive projections can exceed them.
›When is a DCF least useful?
When cash flows can't be forecast reliably, as with early-stage or highly cyclical businesses, or for financial institutions.
›What other methods might you mention?
LBO analysis (what a sponsor could pay), sum-of-the-parts for conglomerates, liquidation value in distress, and the dividend discount model for banks.
Check yourself
What are the three main ways to value a company?
Put it all together
Build a full five-year DCF and decide if the stock is cheap.