Valuation fundamentals

Valuation answers a single question: what is a fair price to pay for a business today, given what it earns and what it will earn?

There's no exact answer - valuation is a range, not a number. But the frameworks for arriving at that range are well-established.

Three approaches

1. Earnings-based multiples. Take a profit number (PAT, EBITDA, EBIT) and apply a multiplier (P/E, EV/EBITDA, EV/EBIT). The multiplier reflects expected growth and quality. Simplest, most-used.

2. Asset-based. Take the company's net assets (book value of property + cash + inventory − debts) and discount/premium it based on quality. Used for asset-heavy businesses where book value is meaningful (banks, real estate, holding companies).

3. Cash-flow based (DCF). Project the cash flows the business will generate over the next 10-15 years, discount each back to today's value, sum them up. Theoretically most rigorous, but very sensitive to assumptions.