Equity Valuation Methods - Types - Balance Sheet, DCF, Earnings Multiplier

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Equity valuation methods can be broadly classified into balance sheet methods, discounted
cash flow methods, and relative valuation methods. Balance sheet methods comprise of book
value, liquidation value, and replacement value methods. Discounted cash flow methods include
dividend discount models and free cash flow models. Lastly, relative valuation methods are a
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price to earnings ratios, price to book value ratios, price to sales ratios etc. SUBSCRIBE TO BLOG VIA EMAIL
Tweet A financial analyst primarily conducts two types of analysis for evaluation of equity investment Enter your email address to subscribe to this
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decisions viz. fundamental and technical analysis. All the above methods are part of the
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fundamental analysis conducted by a financial analyst. The technical analysis analyses the
charts and graphs of the market prices of a stock to understand the sentiments of the market. It Email Address
believes in a fact that history repeats itself. Many believe that it is used to decide the entry and
exit time from the market. On the other hand, fundamental equity valuations methods attempt to Subscribe
find the fair market value of equity share. it involves a study of the assets, earning potential,
future prospects, future cash flows, magnitude and probability of dividend payments etc.
CLASSIFICATION / TYPES OF EQUITY Table of Contents [show] ADVERTISMENT
VALUATION METHODS
Fundamental equity valuation methods are explained in brief under the following categories.
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BALANCE SHEET METHODS / TECHNIQUES
Di erence Between Operating 
Balance sheet methods are the methods which utilize the balance sheet information to value a and Financial Lease
company. These techniques consider everything for which accounting in the books of accounts
is done.
Types of Letter of Credit (LC)
BOOK VALUE METHOD
In this method, book value as per balance sheet is considered the value of equity. Book value
means the net worth of the company. Net worth is calculated as follows:
Capital Structure Theory –
Modigliani and Miller (MM)
Net Worth = Equity Share capital + Preference Share Capital + Reserves & Surplus – Approach
Miscellaneous Expenditure (as per B/Sheet) – Accumulated Losses.
Advantages and Disadvantages of

Leasing
Advantages and Disadvantages of

Bank Overdraft
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     
LIQUIDATION VALUE METHOD

Here, In liquidation cost method liquidation value is considered the value of equity. Liquidation
value is the value realized if the firm is liquidated today.
Liquidation Value = Net Realizable Value of All Assets – Amounts paid to All Creditors
including Preference Shareholders.
REPLACEMENT COST METHOD

Here, In replacement cost method the value of equity is the replacement value. It means the
cost that would be incurred to create a duplicate firm is the value of the firm. It is assumed that
the market value and replacement value will coincide in the long run. The famous ratio by
James Tobin is Tobin q which tends to become 1. Tobin q is the ratio of market value to
replacement cost.
Equity Value = Replacement Cost of Assets – Liabilities.
DISCOUNTED CASH FLOW METHODS / TECHNIQUES

Discounted cash flow methods are based on the fact that present value all future dividends and
the future price represent the market value of equity.
DIVIDEND DISCOUNT MODEL
This dividend discount model finds the present value of future dividends of a company to derive
the present market value of equity. There are various models with different assumptions of a
period of dividends and growth in dividends.
Single period Model

Multi-period Model
Zero Growth Model
Constant Growth Model
Two Stage Growth Model
H Model
FREE CASH FLOW MODEL

This model is based on free cash flows of the company. Similar to above model, it discounts the
free future cash flows of the company to arrive at an enterprise value. To find the value of equity,
value of debt is deducted from enterprise value.
EARNINGS MULTIPLE OR COMPARABLES OR RELATIVE

VALUATION METHODS / TECHNIQUES
Earnings multiple or Relative Valuation methods are also called comparable methods because
they use peers or competitors value to derive the value of the equity. The importance here is of
deciding which factor to be considered for comparison and which companies should be
considered peers. Following are the well-known methods used for such comparison.
PRICE TO EARNINGS RATIO

Please find detailed understanding of the ratio – P/E Ratio
PRICE TO BOOK VALUE RATIOS

Please find detailed understanding of the ratio – Market to Book Ratio
PRICE TO SALES RATIO
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Last updated on : March 23rd, 2019
About The Author

Sanjay Bulaki Borad
Sanjay Borad is the founder & CEO of eFinanceManagement. He is
passionate about keeping and making things simple and easy. Running this
blog since 2009 and trying to explain "Financial Management Concepts in
Layman's Terms".
One Response
Akhilesh Porwal
i find this content meaningful in simple language , I need to check how these
fundamentals are applied for an equity analysis
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Home Sources of Finance  Working Capital  Investment Decisions  Financial Analysis  Budgeting  Corporate Finance 

Search the site

Equity Valuation Methods Search

CLASSIFICATION / TYPES OF EQUITY Table of Contents [show] ADVERTISMENT

Advantages and Disadvantages of

Advantages and Disadvantages of

LIQUIDATION VALUE METHOD

REPLACEMENT COST METHOD

Equity Value = Replacement Cost of Assets – Liabilities.

DISCOUNTED CASH FLOW METHODS / TECHNIQUES

DIVIDEND DISCOUNT MODEL

Single period Model

FREE CASH FLOW MODEL

EARNINGS MULTIPLE OR COMPARABLES OR RELATIVE

PRICE TO EARNINGS RATIO

PRICE TO BOOK VALUE RATIOS

PRICE TO SALES RATIO

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