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Business Valuation Methods

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Category – Business Valuation Methods

Business valuation methods are techniques used to determine the economic value of a company. Common methods include discounted cash flow (DCF), comparable company analysis (CCA), and precedent transaction analysis (PTA). In trading, accurate business valuation is critical for assessing investment opportunities, particularly when considering mergers, acquisitions, or stock purchases. Traders rely on these methods to estimate a company’s worth, understand market pricing, and make informed decisions based on financial health and growth prospects.

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BOOK VALUE

Book Value represents the net value of a company’s assets after deducting liabilities, providing insight into its intrinsic worth.

MARKET VALUE

Market Value reflects the executed dollar value of a trade, based on market price and quantity. Not related to company valuation.

FREE CASH FLOW (FCF)

Free Cash Flow (FCF) represents cash remaining after operating and capital expenses, showing liquidity and growth potential.

CURRENT RATIO

Current Ratio measures a company’s ability to cover liabilities with assets, indicating liquidity and financial stability.

CURRENT ASSETS

Current Assets are liquid resources convertible to cash within a year, crucial for short-term obligations and operations.

CURRENT LIABILITIES

Current Liabilities are obligations due within a year, showing short-term financial commitments and operational constraints.

EARNINGS BEFORE INTEREST AND TAXES (EBIT)

Earnings Before Interest and Taxes (EBIT) measures profitability from core operations, excluding financing and tax effects.

EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA)

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) measures operating profitability excluding non-cash expenses.

INTEREST COVERAGE RATIO

Interest Coverage Ratio measures a company’s ability to cover interest expenses using EBIT, highlighting financial resilience.

PRICE-TO-SALES RATIO (P/S RATIO)

Price-to-Sales Ratio compares a company's market value to its revenue, assessing its valuation relative to sales performance.

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