Comparable Analysis
If you want to find out what a company is worth, you can compare it with a company of the same size such as its competitor. To do a comparative analysis, look at the P/E ratio, EBIT, and use other valuation methods to compare the company’s financials.
Often companies are not making huge profits but that is not a measure of their success because they are focusing on providing customer value, investing in other projects, and preparing the ground for maximizing shareholder value.
Determine the Company’s Capital Structure
The percentage of equity and debt in a company’s capital may not be the best measure of its value but it can help identify the financial position of the company. Compare the company’s capital structure. Compare it with the company's competitors and other companies of similar size. Check liquidity of the capital structure of the company. More liquidity means that there are higher chances of survival when the company incurs a temporary loss in the short-term.
Several companies that went bankrupt during the early lock-down due to COVID suffered because they did not have enough cash to pay fixed costs. However, the companies that held a sufficient amount of cash kept paying immediate expenses and survived. It may not be true for every company but it was the case for many small and mid-size companies that were not liquid
Discounted Cash Flows
Many savvy investors value a company based on discounted cash flows. The investors estimate the cash flows that are cash remainders after deduction of interest, taxes, and expenses. This amount is distributed among the shareholders and is called the dividend. The investors calculate the cash flows that move in and out of the business.
Estimating the future cash flows and then discounting them to the current period provides an estimate of the value of the investment to the investors.
