Four Ways to Value a Business: DCF, Comps, EVA & APV

Ask three people what a business is worth and you may get three different numbers, not because someone is wrong, but because they're answering different questions. Serious valuation uses four methods, and the most useful output isn't a single figure. It's understanding where the methods agree, where they diverge, and why.

Why no single method is "right"

A business is worth what its future cash flows are worth, what a buyer will pay for comparable businesses, and whether it earns more than its cost of capital. Those are genuinely different questions. When a discounted-cash-flow value sits far above the market price, that gap is information, either the market is missing something, or your assumptions are too optimistic. Reconciling it is the actual analysis.

Method 1, Discounted Cash Flow (DCF)

DCF builds value from the inside out. Project the free cash flow the business will generate, discount each year to today at a rate reflecting its risk (the WACC), and add a terminal value for the years beyond the forecast. The result is intrinsic value, grounded in the business's own economics rather than market sentiment. Its strength is that grounding; its weakness is sensitivity, since small changes in the discount rate or growth assumption swing the answer widely.

Method 2, Market Comparable Analysis

Comparables read value off the market. Find genuinely comparable businesses, compute their valuation multiples (EV/EBITDA is standard), and apply a like-for-like multiple to your subject's earnings. The market does the pricing; you translate it. The discipline is in choosing real comparables and comparing on the same basis, for example, if one peer leases its real estate and another owns it, you must compare on an after-rent basis or the lease penalty stays hidden.

Method 3, Economic Value Added (EVA)

Profit alone doesn't mean value was created. EVA asks a stricter question: did the business earn more than the cost of the capital tied up in it? If return on invested capital exceeds the weighted-average cost of capital, value is created; if not, even with positive net income, value is being destroyed. This catches value destruction that a healthy-looking income statement hides.

Method 4, Adjusted Present Value (APV)

APV values the business as if it were all-equity financed, then adds the value of financing effects, most commonly the debt tax shield, separately. It's the method of choice when capital structure is complex or changing, because it keeps operating value and financing value from getting tangled together.

Triangulation: the answer is the range, and the reason

Run all four, lay the results side by side, and weight them by the situation. A stable, cash-generative business leans on DCF and EVA. An active M&A market with good comparables weights comps. A leveraged or lease-heavy structure needs APV and after-rent comps. The mark of serious valuation work is not a single confident number, but a defensible range with a clear view of which method the situation should weight most.