Valuation: it's not just for Wall Street. Imagine pricing a share of stock, figuring out if that neighborhood café is a good deal, or even assessing a new crypto token. What’s it really worth? At SimpleSwap, we cut through the complexity. Forget the jargon. We're offering simple methods, quick sanity checks, and a crypto-aware perspective, all drawn from our day-to-day observations in the market and our commitment to clear educational content. This is a valuation method definition made accessible, showing why valuation matters for solid investment choices.

Understanding Valuation

For anyone wondering “What is valuation?”, let's solidify the core valuation concepts and applications relevant across diverse asset classes. Understanding valuation sets the stage for informed decision-making.

Intrinsic vs. market value

Intrinsic value is what an asset is truly worth based on its fundamentals – think expected cash flows or its actual utility. Market value, on the other hand, is what it's trading for right now, driven by supply, demand, and sentiment. If there’s a big difference between these two, it might mean something is under or overvalued.

Think of it like this: a house appraisal gives you the intrinsic company's value, carefully considered. But the current bids? That's the market speaking. Keep in mind, intrinsic value is model-dependent, loaded with assumptions. Market price? It dances with sentiment and available liquidity.

Absolute vs. relative approaches

Two main roads lead to valuation: absolute and relative. The approach you select should depend on the assets being considered and market considerations.

Absolute valuation aims to pin down a value from an asset's expected cash flows or underlying economics. A classic example is a discounted cash flow valuation (DCF) analysis. Relative valuation, by contrast, looks at what similar assets are going for. It uses comparables and multiples to determine the value. Absolute valuation is great for assets with predictable cash generation, like a mature, stable company. Relative valuation shines in fast-moving or early-stage situations. This might sound like unnecessary info, but it will definitely come in handy when asking the questions of “What are valuations?” and others.

Where valuation is used

Valuation is not just reserved for investment banks, it's a skill with wide ranging applications in your financial journey.

Valuation isn't just an academic exercise. It's a powerhouse that informs critical decisions. It drives investment decisions, shapes negotiations in M&A valuation and capital raising, guides financial reporting allocations, and even feeds into strategic planning. Because of what valuation is, these numbers directly impact pricing, perceived risk, and the allocation of capital across various opportunities.

Think of it in moments: deciding on a reasonable offer range for a business, figuring out how much of an asset to buy while leaving room for error, or determining the worth of an asset before a deal.

Simple Business Valuation Methods

Now, let's arm ourselves with straightforward valuation techniques you can put into action right away. These methods offer a balance of simplicity and effectiveness.

Price multiples (P/E, EV/Revenue, EV/EBITDA)

Valuation multiples provide quick, comparative snapshots.

The Price-to-Earnings ratio (P/E) works best for companies with stable profits.
Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) allows for capital-structure-neutral comparisons.
Enterprise Value to Revenue (EV/Revenue) becomes useful when assessing growth companies with negative earnings.

Always sanity-check values against peer medians to ensure relevance. Be wary of distortions caused by one-off events or negative future earnings.

For instance, if the median EV/EBITDA for comparable company analysis results is 10x, and your target's normalized EBITDA is $5 million, the implied enterprise value would be approximately $50 million. Keep in mind that negative EBITDA makes EBITDA-based numbers invalid, and that standard value ranges can differ significantly across sectors. So be vigilant when assessing what is financial valuation. Looking at medians is a great way to define valuation in the real world, but always sanity check against individual circumstances.

Comparables (public comps and transactions)

We can also use comparable companies to hone in on a more specific valuation range.

Finding solid public comps and studying precedent transactions demands that you identify truly similar companies and normalize their metrics. The comparable company analysis framework is especially effective here. Compute medians and interquartile ranges, then apply these to your target company to arrive at a valuation range. Remember to balance insights from current market comparables with those from past transactions to avoid the temptation of cherry-picking data to support a desired outcome.

The process involves: selecting a group of comparable companies, gathering their financial data, adjusting the data to remove any non-recurring items, calculating median multiples, applying these to the subject company, and then validating the results using a second valuation metric. While this method offers speed and relative simplicity, be aware of potential risks related to comparability between the selected companies.

DCF-lite (quick cash-flow approach)

For circumstances that provide clearer future cash flows, performing a Discounted Cash Flow can be very insightful. This helps value a business when income projections are reliable.

A discounted cash flow (DCF) – even a streamlined one – can provide a ballpark intrinsic value. Estimate free cash flow (free cash flow) for the next 3–5 years. Apply a conservative discount that reflects the risk involved. Then, use a terminal multiple or a terminal growth rate to project value beyond that period. Remember, the valuation will be highly sensitive to the inputs you choose.

Here's a plug-and-play approach: project free cash flow, select a discount rate that reflects the perceived risk, choose a terminal EBITDA in line with comparable companies, and then illustrate how small changes in the discount rate or growth rate significantly impact the final valuation.

Valuation Methods Explained

To make this practical, let's review key business valuation methods that analysts and investors use:

Comparable Company Analysis (CCA)Also known as "trading comps," this valuation method involves comparing the target firm to similar companies in the same sector. Metrics like EV/EBITDA and P/E are assessed to estimate a company's fair market value of a business. CCA is highly effective and commonly applied when markets are stable.
Discounted Cash Flow (DCF)Discounted cash flow method calculates the present value of a company's projected future cash flows, discounted at a rate reflecting risk. This method may offer a robust approach, and is especially useful when you're trying to determine economic value a company with predictable earnings.
Asset-Based ValuationThis asset-based approach estimates the worth of a company or asset based on its net asset-based value (assets minus liability). It gives a clear idea of how much an organization is worth if liquidated, making liquidation value an important metric.
Precedent TransactionsThis approach compares your target firm to companies recently sold or merged. The method used helps derive the business's value by relying on actual deal multiples.

There is no one method that fits everyone. Readers are advised to use multiple options together to improve accuracy. Choosing the right technique depends on the purpose — whether you're acquiring, investing, or restructuring.

Valuation process in practice: quick-start playbooks

Let's look into applying our what is a valuation knowledge in specific cases to ensure that we're thinking logically.

Public stock (growth company)

For a growth company traded on the public markets or similar businesses, start with EV/Revenue or EV/EBITDA comparables, depending on the company's profitability. Sanity-check this valuation with a DCF-lite model. Scrutinize its unit economics, ensuring that you're not overpaying for growth without a clear path to profitability and strong margins.

Here's a quick checklist: identify comparable companies, compute the median EV/Revenue or EV/EBITDA, apply this value to the target company's revenue or EBITDA, run a simplified DCF analysis using conservative growth assumptions, and compare the results. For instance, if a comparable company being valued and trading at 8x EV/Revenue and the target company has $20 million in revenue, the implied value of a company would be $160 million.

Private business (SMB)

Small to medium-sized businesses are a very common investment opportunity, especially for those looking to directly manage an operation

When valuing a private company, especially a small to medium-sized business (SMB), be sure to normalize the owner's compensation, removing any non-recurring items from the financial statements. Then, apply an appropriate EBITDA value, and sanity-check the result against the company's cash flow to establish a reasonable range.

Common adjustments to different businesses include: normalizing owner's compensation to reflect market rates, adjusting for related-party rent, and removing one-time legal or consulting fees. Applying a 4–6x multiple to the normalized EBITDA typically provides a defensible valuation range.

Crypto asset (utility token)

Digital assets can be uniquely challenging when it comes to traditional valuation approaches.

For crypto valuation, dive deep into the project's tokenomics – its utility and how tokens are created and used. Examine the supply schedule and any planned unlocks of tokens. Estimate liquidity by checking trading depth and spreads. And analyze on-chain activity to gauge real-world usage. Then, triangulate these findings with network metrics and numbers from comparable tokens. This approach helps avoid basing your findings solely on price momentum.

First, clearly explore the token's use case. Map how value accrues to the token. Carefully consider the circulating supply versus the fully diluted supply, paying attention to unlock schedules. Check liquidity across exchanges, looking for fragmentation. Then, compare the token to similar protocols, assessing circulating supply, network activity, and overall health. By addressing these elements, the question of what valuation is can be applied effectively.

Key assumptions and common pitfalls

No amount of work on your model can produce reliable results if there are issues. It's important to highlight errors to avoid when determining how much business is worth.

Sensitivity to assumptions

Small changes in your assumptions – like the discount rate, growth rate, or profit margins – can significantly impact the valuation method. Create base, bull, and bear case scenarios. Focus on defining a range of potential values rather than pinpointing a single target number.

Encourage the reporting of medians and interquartile ranges, and clearly identify which assumptions have the greatest influence on the model.

Data quality and normalization

Numbers are only as good as the inputs that go into them, so pay close attention to where you are pulling information from.

The quality of your data directly affects the reliability of your valuation. Normalize revenue and EBITDA, remove any one-off or non-recurring items, and account for cyclicality or seasonality to avoid misleading values. Clean data and normalized earnings are very important.

Common adjustments include restructuring costs, one-time litigation expenses, anomalies related to the COVID-19 pandemic, and inventory write-downs. These adjustments ensure better comparability across peer companies.

Multiples misuse and cherry-picking

Comparable companies and reasonable outlooks can make or break a valuation; ensure you're making apples-to-apples comparisons. Use numbers that are appropriate for the specific business model and select truly comparable peer companies. Avoid inflated valuations that result from mixing dissimilar sectors, geographies, or growth profiles, which breaks comparability.

Here’s a “don’t do this” example: Don’t use a top-decile growth SaaS number for a cyclical hardware firm.

Crypto angle: tokenomics and market structure

When applied to crypto assets, valuation is an approach; since these techniques are still new, let's explore some special considerations.

Supply mechanics and unlocks

The dynamics around token supply are very important for a space that relies heavily on tokenomics for value accrual.

The relationship between circulating supply and fully diluted supply (FDV), along with vesting schedules, emissions rates, and scheduled unlocks, can compress or expand valuation numbers when new supply enters the market, especially if order books are thin.

Track unlock calendars. Model the potential liquidity needs and estimate market depth post-unlock to anticipate potential price pressure. A project is only as strong as its vesting schedule and emissions plan.

Utility, demand drivers, and network effects

Demand drivers can inform whether a token has the value to last or is simply a meme.

Real utility (such as staking rewards, fee discounts, or exclusive access) and strong user growth and retention are key indicators of intrinsic value. Map out how value accrues to the token, distinguishing between equity-like proxies and pure utility tokens.

Create a value accrual map that shows who pays fees, who captures those fees, and how token holders participate through burns, distributions, or governance rights.

Liquidity and exchange dynamics

Lastly, we must consider how freely a token can be transferred, if nobody is buying or selling an asset - can it truly be considered valuable?

Order book depth, spreads between bid and ask prices, venue fragmentation across different exchanges, and the behavior of market makers all influence price reliability. Thin liquidity can distort valuation signals, making it harder to estimate true value.

From SimpleSwap’s perspective, emphasize the importance of determining liquidity across many venues to better interpret price movements and differentiate between short-term fluctuations and sustainable value.

Cross-checking results and decision-making

Let's finish by exploring solidifying investment theses with a strong backing in reliable valuation.

Triangulation and ranges

When it comes to triangulation, always be sure to get at least three perspectives as you look at reliable resources.

When it comes to triangulation, always be sure to get at least three perspectives as you look at reliable resources. Use two or more business valuations to triangulate a reliable range. Understanding the process of determining the worth of a company or asset strengthens decision-making.

Create a quick matrix summarizing each method, the resulting valuation, your confidence level in that valuation, the key drivers of the valuation, and any notes on reconciling differences between the methods.

Risk-adjusted decisions

Lastly, be realistic about the risks and rewards inherent in your investments.

Link your valuation to position sizing and margin of safety. Use scenario analysis and establish clear thresholds (e.g., a required discount to fair value) to maintain investment discipline.

Implement practical guidelines such as increasing your position size as the discount to fair value widens and as market liquidity supports easier execution of trades.

Tools, data, and next steps

To get you stared, let's explore some great resources to supercharge your valuation journey.

Data sources and calculators

Make sure to know where your data comes from, ensure the integrity of your resources and that they're aligned with honest reporting practices.

Direct readers to reliable sources of financial data, on-chain analytics platforms, and simple templates for calculating multiples and conducting DCF-lite analyses. The goal is to empower them to immediately apply the methods discussed.

Building a repeatable workflow

Over the long run, repeatable practices will outperform natural talent in building robust investment practices.

Develop a standardized process for data collection, normalization, modeling, cross-checking, and decision logging. Regularly review and refine this workflow to improve accuracy and efficiency over time.
Create a short checklist and emphasize documenting changes in assumptions and relevant market conditions during each review.

Conclusion

Now that we've learned more about the purpose of valuation and how it's done, you have the simple and powerful tools for cross-validation. Start with one valuation method for an asset or company. Add triangulation. Use business valuations and structured valuation strategies to get a clearer picture.

These steps lead to better business decisions and more accurate insights. We invite you to apply the quick value of the company method and continue your learning journey with SimpleSwap's ongoing guides.

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