Company Valuation Methods: The Most Common Errors in Valuations

Abstract:     
In this paper, I describe the four main groups comprising the most widely used company valuation methods: balance sheet-based methods, income statement-based methods, mixed methods, and cash flow discounting-based methods. The methods that are conceptually correct are those based on cash flow discounting. I briefly comment on other methods since - even though they are conceptually incorrect - they continue to be used frequently.

I also present a real-life example to illustrate the valuation of a company as the sum of the value of different businesses, which is usually called the break-up value.

I finish the paper showing the most common errors in valuations: a list that contains the most common errors that the author has detected in the more than one thousand valuations he has had access to in his capacity as business consultant or teacher.

Keywords: Value, Price, Free cash flow, Equity cash flow, Capital cash flow, Book value, Market value, PER, Goodwill, Required return to equity, Working capital requirements

JEL Classifications: G12, G31, M21

Working Paper Series