Different IPO valuation methods and things to know about it

By Rohan A T Tuesday, 22 February 2022

Finance is the life blood for a business and it is extremely important that businesses have or acquire ample financial resources so that they can run their business without having to adversely impact their operations. For many years IPOs or initial public offerings has become one of the most effective ways for businesses to raise funds so that they can take their operations to the next level. Many might have doubts regarding IPO Advantages and Disadvantages. When it comes to advantages, IPOs allow a business to raise capital from the public, provide publicity and credibility to the business and help business to reduce the overall cost of the capital. And now, looking at the disadvantages, an IPO also comes with more regulatory requirements as well as disclosures, there will be added market pressure, and transaction costs.

IPO valuation and investment is also another important facet related to IPOs and many might still be unaware about the IPO valuation calculation and the different methods of IPO valuation. So, in this article, we will be addressing these questions and looking more into the different IPO valuation methods that one should be aware of.

  • Relative Valuation

Let’s start with relative valuation and under this method, the company’s share value is calculated by taking into consideration the value that is being set for other similar companies. Also, in relative valuation method, the experts will do a careful examination of both the closer benchmarks in the industry as well as the other companies that are already listed on the stock exchanges.

  • Absolute Valuation

The second method is the absolute valuation method and when it comes to this method, it is used to measure the strength as well as the financial status of a company. Also, under this valuation method, Discounted Cash Flow (DCF) is used in order to assess the wealth of the company.
From this, one can understand that the absolute valuation method is different from the previously mentioned relative valuation owing to the fact that the absolute valuation evaluates a company’s wealth using the time value of money as well as the collection of interest. At the same time, the relative valuation measures a company’s wealth by comparing it their competitor’s wealth.

  • Discounted Cash-Based Valuation

The third method is discounted cash-based valuation methods and in this, several experts will be analysing the expected cash flows, potential revenue sources, investment, and future performance to name a few. When compared to most other IPO valuation methods, the discounted cash-based valuation method takes a lot of hard work as well as understanding owing to the fact that under this method the analysis is made on the business performance, which is something that must have a proper justification.

  • Economic Valuation

Moving on to the fourth method, it is the economic valuation method and this is entirely a mathematical valuation where there will be a set of parameters that are taken into consideration. And these parameters will include debts that need to be paid off, businesses residual income, and risk-bearing potentials to mention a few.     

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