What Is Valuation?
Valuation is the analytical process of determining the current worth of a company, asset, or security. Because no single method captures value perfectly, practitioners typically build a range of values from several approaches and then judge where the true value most likely sits within that range.
The three core methodologies in investment banking are intrinsic valuation (a discounted cash flow, which values a business based on the cash it will generate), relative valuation (comparable company analysis, which benchmarks against similar public companies), and transaction-based valuation (precedent transactions, which looks at what acquirers actually paid for similar businesses).
How It Works
Each methodology answers the value question from a different angle. A DCF projects a company's future free cash flows and discounts them back to today using a rate that reflects risk. Comparable company analysis applies trading multiples like EV/EBITDA or P/E from similar public companies to the target's own financials. Precedent transactions apply multiples from past M&A deals, which usually include a control premium.
Analysts often summarize the output in a chart nicknamed a football field, which lines up the value ranges from each method side by side. Where the ranges overlap is generally where the strongest valuation argument lives.
Example
Suppose a company generates $100 million of EBITDA. If comparable public companies trade at 8x to 10x EV/EBITDA, relative valuation implies an enterprise value of $800 million to $1.0 billion. If precedent M&A deals were done at 11x, a sale process might support roughly $1.1 billion. If a DCF produces $950 million, the analyst might conclude the business is worth around $900 million to $1.0 billion on a standalone basis, with upside in a competitive sale.
Why It Matters
Valuation sits at the center of nearly every finance decision: what price to pay in an acquisition, where to set an IPO range, whether a stock is cheap, or how much debt a buyout can support. Getting it wrong means overpaying or leaving money on the table.
In interviews, "what are the main valuation methodologies and how do they compare?" is one of the most common technical questions, so knowing when each method produces higher or lower values is essential.
