The Little Book of Valuation, Updated Edition

ConclusionRules for the Road

THE MORE THINGS CHANGE, the more they stay the same. As we employed both intrinsic and relative valuation techniques to value firms across the life cycle from Zomato, a young growth company, to Bed, Bath and Beyond, a company whose best days are behind it, we followed a familiar script. The enduring theme is that value rests on standard ingredients: cash flows, growth, and risk, though the effects of each can vary across companies.

Common Ingredients

No matter what type of company you are valuing, you have to decide what you are valuing (just equity or the entire business), the approach you will use to estimate value (intrinsic versus relative valuation), and the key components of value.

When valuing a business, you can choose to value the equity in the business or you can value the entire business. If you value the business, you can get to the value of equity by adding back assets that you have not valued yet (cash and cross-holdings) and subtracting out what you owe (debt). The choice matters because all of your inputs—cash flows, growth, and risk—have to be defined consistently. For most of the companies that we have valued in this book, we have valued the businesses and backed into the value of equity. With financial service firms, our inability to define debt and estimate cash flows did push us into using equity valuation models.

You can also value a business based on its fundamentals, which is the intrinsic value, or you can price it by ...