the more i study business and finance the more i learn its all a crapshoot….but there are 3 ways to valuate a company
1) book value times a multiple —– assets minus liabilities = book value. Then you get the multiple based on market value for similar companies.
2) cash flow times a multple —– how much free cash is the company creating per month/year and them multiple times some industry average multiple
3) P/S (price over sales multiple) —- what premium over the yearly sales is the company worth (just take yearly sales and multiple times a multiple)
the multiple depends on
1) growth potential
2) supply/demand for this type of industry
3) position of this specific company versus its competitors (#1 in its market, etc)
4) risk factor – how likely it is to hit its targets, etc
I would say easiest is (1) book value times a multiple – but what multiple?!!?!?!?!?! Guess we can look at Amazon.com and Ebay.com
What it really comes down is – WHAT IS SOMEONE WILLING TO PAY….and how much do they believe in the management team….which is why I learn more and more its about delivering on what you promise and never losing your creditibity.