Valuation estimates what a business, share or asset is worth. Most methods fall into three families: income (discounted cash flow), market (comparables) and asset-based. Each answers a slightly different question, so practitioners usually run more than one and explain any gap between them. This guide explains the three families, works through a full DCF with a comparables cross-check, and notes the Indian rules on who may carry out certain valuations.
The three families at a glance
| Approach | Core idea | Typical methods | Works best when | Main weakness |
|---|---|---|---|---|
| Income | Value is the present value of future cash flows | Discounted cash flow (DCF), dividend discount | Cash flows can be forecast with reasonable confidence | Highly sensitive to the discount rate and terminal value |
| Market | Value is what similar businesses or deals are priced at | Trading comparables (multiples such as EV/EBITDA, P/E), precedent transactions | Good peers or recent deals exist | Peers are rarely truly comparable; market moods move multiples |
| Asset-based | Value is the net worth of the assets less liabilities | Net asset value, replacement cost, liquidation value | Asset-heavy businesses, holding companies, distressed cases | Ignores the value of future earnings and intangibles |
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Continue with Sarkari Resume Templates₹299 — coaching के एक महीने से काफ़ी सस्ता / far cheaper than a month of coachingWorked example: a five-year DCF
The company and figures below are illustrative, not a valuation of any real business.
Inputs
- Forecast free cash flow to the firm (₹ crore): year 1 40, year 2 46, year 3 52, year 4 57, year 5 61
- Discount rate (weighted average cost of capital, WACC): 12%
- Long-term growth after year 5: 5%
- Net debt: ₹100 crore; shares outstanding: 5 crore
Step 1: discount each year's cash flow. Divide each figure by 1.12 raised to the power of the year.
| Year | Free cash flow | Discount factor at 12% | Present value |
|---|---|---|---|
| 1 | 40 | 1.1200 | 35.71 |
| 2 | 46 | 1.2544 | 36.67 |
| 3 | 52 | 1.4049 | 37.01 |
| 4 | 57 | 1.5735 | 36.22 |
| 5 | 61 | 1.7623 | 34.61 |
| Total | about 180.2 |
Step 2: terminal value. Using the growing-perpetuity formula, terminal value at the end of year 5 = 61 × 1.05 ÷ (0.12 − 0.05) = 64.05 ÷ 0.07 = ₹915 crore. Its present value is 915 ÷ 1.7623 ≈ ₹519.2 crore.
Step 3: enterprise and equity value. Enterprise value ≈ 180.2 + 519.2 = ₹699.4 crore. Subtract net debt of ₹100 crore to get an equity value of about ₹599.4 crore, or about ₹119.9 per share across 5 crore shares.
Step 4: notice what drives the answer. The terminal value makes up about 74% of the enterprise value (519.2 ÷ 699.4). Most of this valuation rests on assumptions about the years after the forecast. That is common, and it's why the next step matters.
Sensitivity: how much the assumptions matter
Enterprise value (₹ crore) for different discount rates and long-term growth rates, with the same five cash flows:
| WACC ↓ / growth → | 4% | 5% | 6% |
|---|---|---|---|
| 11% | 723.0 | 818.7 | 952.6 |
| 12% | 630.2 | 699.4 | 791.7 |
| 13% | 558.1 | 610.1 | 676.9 |
In this example, a one-point change in either input moves the value by roughly 10–17%. Changing both at once, to a lower WACC and higher growth, lifts it by about 36%. Present a DCF as a range with stated assumptions, never as a single "correct" number.
Cross-check with comparables
Suppose the company's next-year EBITDA is expected to be ₹90 crore, and listed peers trade at 7–9 times EV/EBITDA (both figures are illustrative). That implies an enterprise value of 7 × 90 = ₹630 crore to 9 × 90 = ₹810 crore. The DCF's ₹699.4 crore sits inside that range, which gives some comfort. Had it fallen far outside, you would need to explain why. For example, the company might grow faster than its peers, or the peer group might be poorly chosen.
When choosing comparables, match the business model, size, growth and margins as closely as you can, and use the same definition of EBITDA and net debt for every company.
Indian rules: who may carry out certain valuations
Under Section 247 of the Companies Act, 2013, valuations required under the Act, such as those of a company's shares, securities, goodwill, assets or net worth, must be carried out by a registered valuer. The Insolvency and Bankruptcy Board of India (IBBI) administers registration under the Companies (Registered Valuers and Valuation) Rules, 2017. These recognise three asset classes: land and building, plant and machinery, and securities or financial assets. If you're considering valuation as a career, the IBBI website lists the examination and registration requirements for each class.
Valuations you build for your own analysis, coursework or interview practice aren't valuations required under the Act. Even so, the discipline expected of registered valuers is a good habit: documented assumptions, sources and limitations.
Common mistakes
- Mismatched cash flows and discount rates. Firm-level free cash flow goes with WACC and gives enterprise value. Equity cash flow goes with the cost of equity and gives equity value. Don't mix them.
- Terminal growth above the long-run economy. A perpetual growth rate higher than the long-run nominal growth of the economy implies the company eventually becomes the economy.
- Double counting. If the cash flows already include an investment's returns, don't add the investment again separately.
- Ignoring net debt and other claims. Subtract debt, lease liabilities and minority interests consistently when moving from enterprise to equity value.
- False precision. Reporting ₹119.89 per share suggests a certainty the inputs don't support.
Valuation in interviews
Analyst interviews often ask you to walk through a DCF, defend a discount rate, or explain why two methods disagree. Practise by rebuilding the example above in a spreadsheet, then changing one input at a time and explaining the result. For model structure and checks, see our guide to financial modeling best practices. For reading the statements behind the cash flows, see our financial analysis guide.