Company Valuation Methods: The Complete Guide (2026) | DCF, Comps & Multiples
Master all company valuation methods for finance interviews. Learn DCF, comparable company analysis, precedent transactions, and when to use each approach.
Updated for 2026. Company valuation is the single most important technical skill in finance interviews. Whether you're recruiting for investment banking, private equity, venture capital, or equity research, you'll be tested on your ability to value a company using multiple methods and explain when each approach makes sense.
This guide covers all major valuation methods, when to use each, and how to answer the classic interview question: "How would you value this company?"
Why valuation matters (and why interviews test it so heavily)
Every investment decision starts with a value. Whether you're pitching a stock, modeling an LBO, or advising on an M&A deal, you need to answer: "What is this company worth?"
Valuation tests three things simultaneously:
- Technical skill – Can you build models and do the math correctly?
- Business judgment – Do you understand what drives value in different industries?
- Communication – Can you explain complex concepts simply?
Note
Interviewers often say: "The valuation number matters less than how you think about the problem." But you still need to get the mechanics right.
The valuation framework (your mental model)
There are three fundamental approaches to valuation:
Three Valuation Approaches
| Term | Definition | Note |
|---|---|---|
| Intrinsic Value (DCF) | What are the cash flows worth? | DCF, Dividend Discount Model |
| Relative Value (Comps) | What do similar companies trade for? | Trading Comps, Precedent Transactions |
| Asset-Based | What are the assets worth? | Book Value, Liquidation Value, Replacement Cost |
In most finance interviews, you'll focus on the first two: DCF (intrinsic value) and Comparables (relative value).
Foundation: Enterprise Value vs Equity Value
Before diving into methods, you MUST understand the difference between Enterprise Value and Equity Value.
Enterprise Value = Market Cap + Debt + Minority Interests + Preferred Stock - CashEV represents the total value of the company's operations available to all investors (debt and equity holders)
Equity Value = Market Cap = Share Price × Shares OutstandingEquity Value represents the value available only to common equity shareholders
Why this matters
Different valuation multiples pair with different value metrics:
Value Metric Pairing
| Term | Definition | Note |
|---|---|---|
| EV/EBITDA | Enterprise Value | EBITDA is before interest (capital structure neutral) |
| EV/Revenue | Enterprise Value | Revenue is before interest |
| P/E Ratio | Equity Value | Net Income is after interest (only for equity) |
| P/B Ratio | Equity Value | Book Value belongs to equity holders |
Test Yourself
Interview Question
A company has a market cap of €500m, debt of €200m, cash of €50m, and minority interests of €30m. What is the Enterprise Value?
Method 1: Discounted Cash Flow (DCF) Analysis
DCF is the intrinsic value approach. It values a company based on the present value of its future cash flows.
The DCF Process (in interview language)
How to Build a DCF
Project Free Cash Flows
Forecast 5-10 years of Unlevered Free Cash Flow (EBIT × (1-Tax Rate) + D&A - Capex - Change in NWC)
Calculate Terminal Value
Use either Perpetuity Growth Method (FCF × (1+g) / (WACC - g)) or Exit Multiple Method (EBITDA × Multiple)
Calculate WACC
Weighted Average Cost of Capital = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1-Tax Rate))
Discount Everything to Present Value
PV = FCF / (1 + WACC)^n for each year, plus PV of Terminal Value
Calculate Implied Share Price
Enterprise Value - Net Debt = Equity Value. Divide by shares outstanding for price per share.
Interview Pro Tip
When asked "Walk me through a DCF," start with the big picture (forecasting cash flows, discounting them back), then drill into each component only if they ask.
When to use DCF
- Mature, profitable companies with predictable cash flows
- Project finance / infrastructure with contracted cash flows
- When you have strong conviction on growth assumptions
- As a sanity check against market multiples
When NOT to use DCF
- Early-stage startups with no cash flows (use revenue multiples or VC method)
- Highly cyclical companies where "normalized" is hard to define
- Financial institutions (banks, insurance) – use P/B or P/E instead
- When you have no visibility into future cash flows
Test Yourself
Interview Question
You're valuing a company using DCF. WACC increases from 8% to 10% while cash flows stay constant. What happens to the valuation?
Method 2: Comparable Company Analysis (Trading Comps)
Comparable Company Analysis values a company based on the multiples that similar public companies trade at today.
The Trading Comps Process
- Select comparable companies
- Same industry / sector
- Similar size (revenue, market cap)
- Similar business model and growth profile
- Similar geography / end markets
- Calculate multiples for each comp
- EV/Revenue, EV/EBITDA, EV/EBIT
- P/E, P/B (for equity value multiples)
- Determine valuation range
- Look at 25th percentile, median, 75th percentile
- Remove outliers if necessary
- Apply multiples to your company
- Use the company's LTM or NTM metrics
- Generate a valuation range, not a single number
The #1 Mistake Candidates Make
Using companies that are superficially similar but have very different business models, growth rates, or margins. A 10% growth SaaS company should not be compared to a 100% growth SaaS company.
Common Trading Multiples Explained
Trading Multiples Quick Reference
| Term | Definition | Note |
|---|---|---|
| EV/Revenue | Best for: High-growth, pre-profit companies | Simple, but ignores profitability |
| EV/EBITDA | Best for: Most industries, standard valuation | Capital structure neutral, easy to compare |
| EV/EBIT | Best for: Capital-intensive businesses | Accounts for D&A differences |
| P/E Ratio | Best for: Mature, profitable companies | Simple but affected by capital structure |
| P/B Ratio | Best for: Financial institutions | Book value more relevant for banks |
Test Yourself
Interview Question
You're selecting comparable companies for a SaaS company with 80% gross margins and 100% revenue growth. Which comp set is BEST?
Method 3: Precedent Transaction Analysis
Precedent Transaction Analysis values a company based on multiples paid in recent M&A transactions for similar companies.
Trading Comps vs Precedent Transactions
Key Differences
| Term | Definition | Note |
|---|---|---|
| Trading Comps | Current market trading value | Lower (no control premium) |
| Precedent Transactions | Actual M&A deal values | Higher (includes control premium, typically 20-40%) |
When to use Precedent Transactions
- M&A advisory – Most relevant for deal work
- When there are recent, relevant transactions in the sector
- To establish a ceiling valuation (what acquirers have paid)
Challenges with Precedent Transactions
- Deal specifics matter – Strategic vs financial buyer, synergies, timing
- Limited data – Fewer transactions than trading comps
- Market conditions change – 2021 deals may not be relevant in 2026
Other Valuation Methods (Industry-Specific)
Dividend Discount Model (DDM)
Used for: Mature companies with stable dividend policies (banks, utilities, REITs)
Formula: Equity Value = Dividends per Share / (Cost of Equity - Growth Rate)
Sum-of-the-Parts (SOTP)
Used for: Conglomerates with multiple business segments
Approach: Value each segment separately, then add them up
Liquidation Value
Used for: Distressed companies, special situations
Approach: Value assets at their liquidation value (usually discounted)
Venture Capital Method
Used for: Early-stage startups
Approach: Work backwards from exit value using target IRR
Test Yourself
Interview Question
You're valuing a startup with no profits, high burn rate, but strong revenue growth and clear path to profitability. Which valuation method is MOST appropriate?
The Interview Question: "How would you value this company?"
This is the #1 valuation question in interviews. Here's the framework to answer it:
The Perfect Answer Structure
- "I would use multiple methods to triangulate a valuation range."
(Shows you understand no single method is perfect) - Name 2-3 specific methods and explain why they're appropriate for this company.
"For a mature industrial company, I'd use DCF because cash flows are predictable, EV/EBITDA comps because it's the standard in this industry, and precedent transactions to see what acquirers have paid." - Mention any methods you'd avoid and why.
"I wouldn't use P/E because the company has volatile earnings, so EBITDA is more stable." - Talk about how you'd weight the methods.
"I'd weight DCF and comps equally, using precedents as a ceiling check."
Decision Framework by Company Type
Valuation Method Selection by Company Type
| Term | Definition | Note |
|---|---|---|
| Mature, Profitable Company | DCF (primary), EV/EBITDA comps, P/E ratio | Predictable cash flows |
| High-Growth Tech (profitable) | DCF, EV/Revenue comps, precedent transactions | Growth story matters more than current profitability |
| High-Growth Tech (unprofitable) | EV/Revenue comps, DCF with long forecast | No earnings to multiple |
| Cyclical Industrial | EV/EBITDA on normalized earnings, precedents | Current earnings may be distorted |
| Financial Institution | P/B ratio, P/E ratio, DDM | Cash flow metrics less meaningful |
| Early-Stage Startup | VC method, revenue multiples | No traditional cash flows |
Common Valuation Mistakes (and how to avoid them)
- Mixing EV and Equity Value metrics
Fix: Always check: Is this metric before or after interest? Match it to the right value. - Using LTM EBITDA when the company is rapidly growing
Fix: Use NTM (Next Twelve Months) projections for high-growth companies. - Picking comps based only on industry classification
Fix: Screen for business model, growth rate, margins, size. - Forgetting to adjust for net debt when going from EV to Equity Value
Fix: Always: Equity Value = EV - Net Debt - Using a DCF for a company you can't forecast
Fix: If you don't have conviction on cash flows, rely more on comps.
Test Yourself
Interview Question
Company A and Company B have identical EBITDA and market cap. Company A has more debt and trades at a lower EV/EBITDA multiple. What's the MOST LIKELY explanation?
4-Week Valuation Mastery Plan
Your Valuation Interview Prep Timeline
Week 1: Foundations
Master EV vs Equity Value. Memorize the bridge formula. Practice 50 quick calculation questions. Read and understand a sample DCF model.
Week 2: DCF Deep Dive
Build a DCF from scratch (pick any public company). Calculate WACC manually. Run sensitivity tables on WACC and terminal growth. Practice the 'Walk me through a DCF' answer.
Week 3: Comps & Precedents
Build a trading comps analysis for 5-10 companies. Calculate all major multiples (EV/Revenue, EV/EBITDA, P/E). Research 5 precedent transactions in your target industry. Create a precedent transaction analysis.
Week 4: Integration & Interview Reps
Practice answering 'How would you value this company?' for 5 different company types. Run 2 mock interviews. Do 100+ drill questions on all valuation concepts. Review your weak areas.
Key Valuation Formulas (Memorize These)
Enterprise Value = Market Cap + Net Debt + Minority Interests + Preferred StockNet Debt = Total Debt - Cash. This is the most important formula in valuation.
WACC = (E/V × Re) + (D/V × Rd × (1-Tc))Re = Cost of Equity (CAPM), Rd = Cost of Debt, Tc = Tax Rate. E and D are market values.
Terminal Value (Perpetuity) = FCFn+1 / (WACC - g)g = perpetuity growth rate (usually 2-3%). FCFn+1 = Free Cash Flow in first year of perpetuity.
Implied Share Price = (Enterprise Value - Net Debt) / Shares OutstandingStart with EV from DCF, subtract net debt to get equity value, divide by shares.
CAPM: Cost of Equity = Rf + β × (Rm - Rf)Rf = Risk-free rate, β = Beta, Rm = Expected market return, (Rm - Rf) = Equity risk premium
Related Resources
Continue your valuation interview prep with these specialized guides:
- Walk Me Through a DCF: Interview Answer Framework — Complete DCF walkthrough
- Enterprise Value vs Equity Value: The Complete Explanation — Deep dive on EV vs Equity
- EV/EBITDA Multiple Explained — Most important valuation multiple
- WACC Explained Simply — Master the discount rate
- Trading Comps vs Precedent Transactions — When to use each method
FAQ
Which valuation method is most important for interviews?
DCF and Trading Comps are equally important and tested most frequently. You need to be comfortable building both from scratch and explaining when to use each.
Should I memorize all the formulas?
Yes. At minimum, memorize: EV bridge, WACC formula, Terminal Value (both methods), and basic multiples (EV/EBITDA, P/E). Being able to write these down quickly shows confidence.
How do I pick comparable companies?
Start with industry/sector, then filter by: business model similarity, size (revenue, market cap), growth rate, profitability profile, and geography. Aim for 5-10 good comps, not 20 mediocre ones.
What if the company has no comparable companies?
This happens with unique businesses. Use precedent M&A transactions, look at "close enough" comps with adjustments, or rely more heavily on DCF. Always explain your reasoning.
How many years should I forecast in a DCF?
Typically 5-10 years. For mature companies, 5 years is standard. For high-growth companies, you might extend to 10 years to capture the growth runway before reaching steady state.
Key Takeaways
Key Takeaway
- Always use multiple valuation methods to triangulate a range, never rely on one method
- Master the EV vs Equity Value distinction – this is tested in 90% of interviews
- DCF is the intrinsic value approach (what should it be worth?), Comps are the relative value approach (what do similar things trade for?)
- The answer to "How would you value this company?" depends on the company type, industry, and what information you have
- Practice building models from scratch – interviews often test speed and accuracy under pressure