Company valuation refers to the evaluation of the internal value of the company with an eye to the company itself. The internal value of the company is determined by the company's assets and profitability.
　　
What is company valuation?
　　
Company valuation is the premise of investment, financing and trading. When an investment institution injects a sum of money into an enterprise, the rights and interests it should occupy depend first on the value of the enterprise. The company valuation is conducive to our correct evaluation of the internal value of the company or its business, thus establishing the basis for pricing various transactions. For founders with entrepreneurial plans, it is necessary to conduct company valuation at a certain stage, which is conducive to the scale development of the company.
　　
Company valuation is the most important and critical link in securities research. Valuation is a comprehensive judgment of a company. Whether macro analysis, capital market analysis, industry analysis or financial analysis, valuation is its final destination. Investors should ultimately make investment suggestions and decisions based on valuation.
　　
Basic logic - "Fundamentals determine value, and value determines price"
　　
Method of company valuation
　　
（1） Basis of company valuation
　　
Based on whether the company continues to operate, the basis of company valuation can be divided into two categories:
　　
1. Bankrupt Business is in financial distress and has gone or will go bankrupt. The possible price for selling the company's assets is mainly considered.
　　
2. On going Business (the object of PE investment), assuming that the company will continue to operate in the foreseeable future, can use the following valuation methods.
　　
Method of company valuation
　　
Company valuation methods are generally divided into two categories:
　　
One is the relative valuation method, which is characterized by the simple multiplier method, such as P/E valuation method, P/B valuation method, EV/EBITDA valuation method, PEG valuation method, market sales ratio valuation method, EV/sales revenue valuation method, RNAV valuation method;
　　
The other is the absolute valuation method, which is characterized by the complicated discount method, such as dividend discount model, free cash flow discount model and option pricing method.
　　
The relative valuation method reflects the stock price determined by market supply and demand, while the absolute valuation method reflects the price determined by intrinsic value, that is, the value of the stock is estimated by valuing the enterprise and then calculating the value of each share. Their calculation formulas are as follows:
　　
The relative valuation or comparative valuation method, also known as the comparable company analysis method, uses comparable assets or company values to estimate the value of the underlying assets or companies based on some common value drivers, such as income, cash flow, earnings and other variables. When using the comparable company method, ratio indicators can be used for comparison according to different value drivers, including P/E, P/B, EV/EBITDA, PEG, P/S, EV/sales revenue, RNAV, etc. The most commonly used ratio indicators are P/E and P/B.
　　
Valuation method of unlisted companies
　　
1. Comparable company law of market law
　　
First, select the listed companies that can be compared or referenced with the non listed companies in the same industry, calculate the main financial ratios based on the share prices and financial data of similar companies, and then use these ratios as market price multipliers to infer the value of the target company, such as P/E (price earnings ratio, price/profit), P/S (price/sales).
　　
In the domestic venture capital (VC) market, the P/E method is a common valuation method. Generally speaking, there are two kinds of P/E ratios of listed companies:
　　
Trailing P/E - the current market value/the profit of the company in the previous financial year (or the profit of the previous 12 months).
　　
Forward P/E - the current market value/the company's profit in the current financial year (or the profit in the next 12 months).
　　
Investors are investing in the future of a company. Their P/E valuation method is:
　　
Company value=predicted P/E ratio × profit of the company in the next 12 months
　　
The company's profits in the next 12 months can be estimated through the company's financial forecast. The biggest problem of valuation is how to determine the predicted P/E ratio. Generally speaking, the predicted P/E ratio is a discount to the historical P/E ratio. For example, if the average historical P/E ratio of an industry in NASDAQ is 40, the predicted P/E ratio is about 30. For unlisted companies of the same industry and size, the reference P/E ratio needs to be discounted again, about 15-20. For start-ups of the same industry and small scale, The reference forecast P/E ratio needs another discount, which is 7-10. This means that the current mainstream foreign VC investment in China is the approximate P/E multiple of enterprise valuation. For example, if a company predicts that the profit of the next year after SME financing will be $1 million, the company's valuation will be about $7-10 million. If the investor invests $2 million, the company will transfer about 20% - 35% of its shares.
　　
For companies with revenue but no profit, P/E is meaningless. For example, many start-ups cannot achieve positive forecast profits for many years, so P/S method can be used for valuation. The approximate method is the same as P/E method.
　　
2. Comparable transaction method of market law
　　
Select companies that are in the same industry as start-ups and have been invested or acquired in a suitable period before valuation. Based on the pricing basis of SME financing or M&A transactions as a reference, obtain useful financial or non-financial data from them, calculate some corresponding SME financing price multipliers, and evaluate the target company accordingly.
　　
For example, if Company A has just obtained SME financing, and Company B has the same business field as Company A, and its business scale (such as income) is twice as large as Company A, then investors should value Company B about twice as much as Company A. For example, when Focus Media merges Focus Media and Focus Media respectively, on the one hand, Focus Media's market parameters are taken as the basis; on the other hand, the valuation of the framework can also be taken as the basis for Focus Media's valuation.
　　
The comparable transaction method does not analyze the market value, but only calculates the average premium level of the financing M&A price of SMEs of similar companies, and then calculates the value of the target company with this premium level.
　　
3. Discounted cash flow of income method
　　
This is a relatively mature valuation method. By predicting the future free cash flow and capital cost of the company, the future free cash flow of the company is discounted. The company value is the present value of the future cash flow. The calculation formula is as follows: (CFn: annual predicted free cash flow; r: discount rate or cost of capital)
　　
The discount rate is the most effective way to deal with forecast risk, because the forecast cash flow of a start-up company has great uncertainty, and its discount rate is much higher than that of a mature company. The capital cost of start-ups seeking seed funds may be between 50% - 100%, 40% - 60% for early start-ups and 30% - 50% for late start-ups. In contrast, the cost of capital of companies with more mature business records is between 10% and 25%.
　　
This method is applicable to more mature and later private companies or listed companies, such as Carlyle's acquisition of XCMG.
　　
4. Asset method
　　
The asset approach assumes that a prudent investor will not pay more than the acquisition cost of assets with the same effectiveness as the target company. For example, CNOOC will bid for Unocal and value the company according to its oil reserves.
　　
This method gives the most realistic data, usually based on the funds spent by the company for development. The disadvantage is that the assumed value is equal to the fund used, and investors do not consider all intangible values related to the company's operation. In addition, the asset approach does not take into account the value of future economic returns. Therefore, the result of the valuation of the company by the asset method is the lowest.

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