How do you value a company?

If you are new to finance, this question can feel enormous. How could anyone put a price on a whole company?

The good news is that there are only three real ways to do it. Once you know what each one is and when to use it, this becomes one of the easier questions in an interview.

Here is the idea in one sentence: a company is worth what someone will pay for it, and there are three different ways to work out what that is.

Interviewers ask this early because everything else builds on it. If you can answer this well, the follow-up questions get much easier.

First, what does "value" even mean?

Before the three methods, one thing needs clearing up.

When people say a company is "worth $500 million", they usually mean one of two things, and mixing them up is the fastest way to lose marks.

Equity value is what the owners of the company own. If a company has shares on the stock market, you get equity value by multiplying the share price by the number of shares. This is also called market capitalisation, or market cap.

Enterprise value is what the whole business is worth, including the part paid for with borrowed money. You get it by taking equity value, adding the company's debt, and subtracting its cash.

Why subtract cash? Because if you buy a company that has $50 million sitting in the bank, you get that $50 million back. So it lowers the real price you paid.

Most valuation is done using enterprise value, because it describes the business itself rather than who happens to own it.

The three methods

There is no single correct answer to what a company is worth. So instead of trying to find one number, you use three methods and see where they agree.

Method 1: Trading comparables ("comps")

This is the simplest idea. Look at similar companies and see what the market pays for them today.

Say you want to value a supermarket chain. You find five other supermarket chains that are listed on the stock market. You look at what each one is worth compared to how much money it makes.

That comparison is called a multiple. The most common one is EV/EBITDA.

EBITDA stands for earnings before interest, tax, depreciation and amortisation. It sounds complicated but the idea is simple: it is a rough measure of how much cash the business makes from its normal operations, before any of the money-shuffling. People use it because it lets you compare two companies fairly, even if one borrowed a lot of money and the other did not.

So if the five supermarkets trade at around 8 times EBITDA, and your company makes $100 million of EBITDA, then your company is worth roughly $800 million.

What this method tells you: what buyers are paying right now for a business like this one.

When to use it: when there are genuinely similar public companies to compare against. If your company is one of a kind, this method gets weak fast.

The catch: if the whole market is overexcited about supermarkets, your answer inherits that excitement. Comps tell you what the market thinks, not what something is really worth.

Method 2: Precedent transactions

Same idea, but instead of looking at what companies trade for day to day, you look at what buyers actually paid to buy them outright.

You find deals where a similar company was bought. You work out what multiple the buyer paid. Then you apply that to your company.

These numbers are almost always higher than trading comps. There is a good reason for that.

When you buy a few shares, you own a small slice and have no say in how the company is run. When you buy the whole company, you control it. You can change the strategy, replace the management, or merge it with something you already own. That control is worth paying extra for.

That extra amount is called a control premium. It is often 20 to 40 percent above the market price.

What this method tells you: what someone paid to own the whole thing.

When to use it: when the company might actually be sold, so a real buyer's price is the relevant one.

The catch: deals happen at different times in different market conditions. A deal from three years ago might tell you very little about today.

Method 3: Discounted cash flow ("DCF")

The first two methods ask what other people pay. This one ignores other people completely and asks what the business is worth on its own.

The idea rests on one simple truth: money in the future is worth less than money today.

If someone offers you $100 now or $100 in five years, you take it now. You could invest it, and there is a risk you never see the money in five years at all.

A DCF uses that idea. You estimate how much cash the business will make each year for the next five or ten years. Then you shrink each of those future amounts down to what it is worth today. Then you add it all up.

The shrinking is called discounting, and the rate you shrink by is called the discount rate. For a whole business, that rate is usually WACC — the weighted average cost of capital. In plain terms, WACC is the return the company has to earn to keep both its lenders and its shareholders happy.

There is one more piece. You cannot forecast forever, so after your last forecast year you add one final number that covers everything after that. This is called the terminal value. It is usually the biggest single part of the answer.

What this method tells you: what the business is worth based on its own cash, whatever the market happens to think.

When to use it: when you can predict the cash with some confidence. A steady utility company is a good fit. A three-year-old app company is not.

The catch: small changes in your assumptions cause large changes in the answer. Change the growth rate a little and the value swings a lot. That is why nobody presents a DCF as one number.

Putting the three together

Now you have three answers, and they will not match. That is expected, and it is the point.

Each method looks at the company from a different angle. Comps show today's market. Precedents show what a buyer would pay. A DCF shows what the cash is worth.

You lay all three out side by side as ranges. In banking this picture is called a football field chart, because the overlapping bars look a bit like a pitch marked out in lines.

Where the ranges overlap is your answer. Not one number. A range.

How to actually say it in the room

Aim for about ninety seconds. Something like this:

"There are three main ways to value a company, and in practice you would use all three.

The first is trading comparables. You look at similar public companies and what multiple of EBITDA they trade at, then apply that here. That tells you what the market pays today.

The second is precedent transactions. You look at what buyers actually paid for similar companies. Those numbers are usually higher because they include a control premium.

The third is a discounted cash flow. You project the company's cash for five to ten years, discount it back at WACC, add a terminal value, and get a value based purely on the business itself.

None of them gives one right answer, so you show them as ranges and look for where they overlap."

That is a complete answer. If they want more, they will ask — and now you know which direction they are heading.

What the interviewer is really checking

Do you know all three methods?

This is the basic bar. Naming only one or two suggests you have not prepared. Naming all three in a clear order suggests you have.

Do you know when each one is used?

This is where candidates separate. Anyone can memorise three names. Fewer can say "I would lean on comps here because there are five very similar public companies" or "a DCF is hard for this business because the cash flows are unpredictable".

That sentence is what an analyst actually does all day.

Do you understand that value is a range?

If you give one number and stop, you have shown that you learned a formula rather than an idea. Real valuation produces a range, and everyone in the room knows it.

Can you handle the follow-up?

There is almost always one. Common ones:

• "Which method would you trust most for this company, and why?"
• "Why would precedent transactions be higher than trading comps?"
• "What would make a DCF unreliable here?"

None of these are trick questions. They just test whether you understand the methods or only remember them.

Can you keep it short?

You will be asked to explain complicated things quickly in this job, constantly. A ninety-second answer that covers all three methods is a small demonstration that you can do that.

Common mistakes

Listing the three methods and stopping.

This is the most common version of a weak answer. The names are the easy part. Saying what each one is good for is the actual answer.

Giving one number instead of a range.

Real valuation never produces one number. Saying "it is worth $800 million" full stop shows you have not seen how this works in practice.

Saying the DCF is the most accurate.

Lots of candidates believe this because a DCF looks the most mathematical. But it is built entirely on guesses about the future, and those guesses move the answer enormously. It is the most theoretical method, not the most accurate one.

Forgetting the control premium.

If you cannot explain why precedent transactions come out higher than trading comps, that is a gap. The answer is that buying the whole company buys control, and control costs extra.

Mixing up enterprise value and equity value.

This is the error that ends technical interviews early. If you pair EBITDA with equity value, or net income with enterprise value, the interviewer will usually stop and correct you. Learn the difference before anything else.

Using EBITDA without knowing what it means.

If you say the word, be ready for "so what does EBITDA actually measure, and why do we use it?" Have the plain-English version ready: it is a rough measure of operating cash generation that lets you compare companies with different debt levels fairly.