Question

What are the different methods to value a company? Give a brief description of each, in general which would be expected to have a higher value range?

Answer 1

There are different models to value a company, which could be as follows-

1. Price to earnings ratio-this is the ratio of the market price of the company in relation with the Earning per share of the company.if the Earning per share is relatively high, it is meant that the profit of the company is high and relative the market price of the companies also high . growing firm will have a higher price to earning ratio most of the times.

2. Peg ratio-price to earning growth ratio is just a little modification of price to earning ratio which discounts the growth associated with the earning of the company and if the peg ratio is a smaller, the company has the higher potential of growth and if PEG ratio is higher that means the the market is valuing the company at high valuation.

3. Enterprise value to earning before taxes-this is used to calculate the net worth of the enterprise with relation to the earning of the company.

4. Dividend growth model-this model takes into account the amount of dividend paid by the company and the growth associated with the company and it is adjusted with the expected rate of return by the shareholders.

5. Price to book value-it is an old method of estimation of the value of the company in which the book value of the company is considered in order to to estimate whether the market price is overvalued or undervalued.

price to earning ratio and price to earning growth ratio are the ratios which are presumably valuing a company on the higher side and it is always taking higher growth so that it will always award the company with the higher price to earning multiple.