* P/E (trailing or forward earnings)
* Enterprise value / EBITDA (trailing or forward)
* Enterprise value / revenue (trailing or forward)
If comparable companies trade at 15x next-twelve months earnings, and the company you're valuing is expected to earn $10M in the next year, you value the company at equity value of $150M.
Enterprise value = total debt of a company + total market value of equity - cash
EBITDA is Earnings before Interest, Taxes Depreciation and Amortization and is a proxy for a business' operating cash flow (as opposed to profits, which are not always the same as cash flows).
sure, it’s more unsettling to have a range than a single number but a range is as close to reality as we’re likely to get with any valuation (unless it’s a well-established company in a stable industry, where DCF can provide a tight answer).
It is dangerous because it is not accurate. DCFs are very sensitive to assumptions, and confidence intervals for most assumptions are very wide. Two DCF models with credible, but different assumptions can yield hugely different valuations.
DCFs are also dangerous because stocks are not valued solely based on fundamental cash flows. In startups especially, if you do a typical DCF with conservative assumptions, you will miss outlier returns when an acquirer's thesis hinges upon very aggressive assumptions or synergies that a DCF wouldn't capture. This happens all the time in biotech.
It is not true that DCFs are independent of how the market values things. Many key inputs into the DCF, especially the discount rate and terminal value, are calculated in part based on how the market values things.
In practice, investment bankers and investors use several different methodologies, all somewhat flawed, to triangulate around a valuation. Often the DCF yields the highest valuation of these methodologies.