Question

In addition to the dividend discount model (DDM) and discounted cash flow (DCF) model there are different other valuation models/metrics. Can you identify some of them? Different models may be appropriate for different firms in different industries. Can you identify which models/metrics may be more appropriate for specific industries/firms?

Answer 1

Other models for valuation would be as follows-

A. Price to earning ratio- this is a valuation model in which earnings of the company will be compared with the pricing of the company in the market and then it will be be matched with the industry price to earning ratio in order to find whether the company's overvalued or undervalued according to the industry standards.

This type of valuation is applicable to companies which are having profits in their books of accounts because they are taking Earning per share as their base.

B. Enterprise value to EBITDA- this is used to calculate the enterprise value of an organisation and they are used for comparing it with earnings of the company in order to justify the valuations of the company.

this type of valuation is also applicable to those company who are making profits and companies who are having a higher market capitalisation.

C.Price to earnings growth multiples are also applicable and it is an enhancement of price to earning ratio because price to earning multiple will be considering the growth rate which is associated with the earning of the company and it will be discounting it along with the price in order to arrive at whether the company is undervalued or overvalued.

this can only be applicable to growing companies who have consistent profits.

D. Price to book ratio is another ratio which is used to derive the valuation of the company as it will be comparing the current market price of the company in regard with the book value of the company to derive at whether the company is overvalued or undervalued.

This can be applicable in regards with all the companies which are making profits or not.