The Fundamental Concept of Corporate Valuation

Suraj Dubey
Email: surajdubey11@gmail.com
Phone: 9920880152
Introduction - Concept of Fair Value

▪ What is equity valuation?

A process that involves determining ‘Fair Value’ of a company’s equity in order to assist buy/sell decisions for the purpose of financial or strategic
investment.

▪ What is Fair Value of an investment?

Fair Value is the price at which, one will get the desired rate of return when the investment is sold to a willing & able buyer. The worth of an investment is
determined by whether it is meant for long-term use to generate returns (Strategic Investment) or for resale when the right price or fair value is achieved
(Financial Investment). The purpose of valuation is to determine a fair value range of an investment (or capital asset) using one or more of several available
techniques/methods.

▪ How should the worth of an Investment be determined?

Investment related demand is generally driven by expected return resulting from the demand for other similar opportunities available, potential to
generate cash and implied risk. When determining whether expected return can be achieved, one way is to estimate the cash generated from the Asset
against what is invested after considering ‘Time Value of Money’ (also called as Net Present Value).
The other way is to find out what are other similar opportunities available in the market and then comparing the extra price paid for or money saved by the
Asset. Another approach one may use by determining the cost of a substitute or replacement cost.
Introduction - Who uses Valuation?

Valuation is used at two levels

▪ Primary, which deals with ‘Value Creation’ at a corporate finance level
▪ Secondary, that deals with market intermediaries & investors

Buy Side Institutions
Buy Side refers to those institutions that are engaged in buying research conducted by others. They
invest/manage client’s funds (as well as their own) into investments in primary or secondary markets. Primary
market refers to direct investment in companies while secondary involves buying/selling stocks in the stock
market. E.g. - Mutual Funds, Hedge Funds, Private Equity Firms & Venture Capitalists (any Asset Management
Company).

Sell Side is involved with recommending buy/sell decisions to clients. The buyers of such reports may be Retail
clients, High Net-worth Individuals or Institutional investors. E.g. - Brokerage Houses, Research Firms &
Sell Side Institutions focused KPOs.
(Note: Many Investment Banks play both buy/sell side roles)

Corporate Finance refers to managing finances of a company and involves selecting projects, creating budgets
and arranging funds. Their job is the toughest one i.e. Creating Wealth in the secondary market through
Corporate Finance managing expectations and delivering superior results. They use valuation to understand gaps in expectation
and performance of the firm as a whole and to take decisions at a project level.
Valuation Approaches
▪ Why not have just one approach?
The idea is to capture all dimensions that a investor may be concerned with. Unfortunately, no single valuation methodology is complete and hence two or
more approaches are necessary to arrive at a ‘fair value range’.
Income based
Income based approaches aim to discover value of a
firm through its income metrics like Net profit or
Free Cash Flows etc.
Popular methods - DCF Valuation, Economic Value
Added (EVA) model etc.
Pros
• Cuts through accounting variances and earnings
abnormalities while also considering macro level
implications to determine fair value of the firm
• Considers time value of money
• Most detailed & scientific
• Provides intrinsic value
• Used as a basis to determine whether valuation is
stretched
Cons
• Fails to capture sentiment
• Extremely data intensive
• A forecast, by virtue, brings with it an element of
uncertainty
Market based
Market based approaches aim to capture market
sentiment while also taking into account peer
comparison. E.g. Trading & Transaction Comparables
Popular methods - Relative Valuation (P/E, P/B,
Price/Sales, EV/EBITDA, EV/Sales, etc.)
Pros
• Captures market sentiment
• Very quick & easy to apply
• Works best between quarters results and very
easy to explain/pitch
Cons
• Does not work well for startups
• Has a tendency to overvalue stocks in bullish
markets and undervalue in bearish ones
• Sways with the market as there is no anchor or
intrinsic value
• Many believe that this approach is responsible for
market bubbles
Asset based
Asset based approaches aim to value a firm by
valuing its assets on a carry value, replacement value
or liquidation value basis
Popular methods - Liquidation value approach,
Replacement cost method and Book Value
Pros
• Works best for distressed & loss making
companies
• Works best in the downturn
• Gives ‘worst case scenario’ value (i.e. base price)
• May also be used for target screening as first step
in the M&A transactions
Cons
• Severely undervalues profit making companies by
not capturing market sentiment or business
performance
• Fails to capture market sentiment
• Ignores the fundamental principal ‘business is a
going concern entity’
Valuation Methods
Discounted Cash Flows
DCF Valuation aims to discover the
‘Intrinsic Value’ of a company by
estimating present value of future cash
flows.
Sub Methods:
• Enterprise valuation (FCF/F)
• Equity method (FCFE)
• Economic Profit Model (EVA)
• Adjusted present value approach
(APV)
Pros:
• Very scientific and detailed
• Normalizes accounting noise
• Provides intrinsic value
Cons:
• Sensitive to many factors most of
which are at the discretion of the
analyst
• Does not work well between quarters
• Fails to capture sentiment
Best Suited For: The long term.
Acts as an anchor for other methods.
Trading Comparables
Relative Valuation aims to determine
valuation by peer comparison and hence
captures market sentiment
Sub Methods:
• Equity & Enterprise Multiples
Pros:
• Capture market sentiment
• Quick & easy to apply
• Works between quarters
Cons:
• In the real world, there is no such
thing as a perfectly comparable
company
• Valuation is always biased as there is
no benchmark valuation of the
company in question
• Bull markets lead to more bullish
valuation and vice-versa
Best Suited For: The short term.
Highly volatile companies, cyclical
companies.
M&A Valuation
Although not an entirely different
methodology it deals with judging the
feasibility of a merger/acquisition using
slightly modified techniques
Methods Used:
• Accretion/Dilution Analysis (measures
whether EPS increases or decreases
post deal)
• Transaction Comparables (scrutinizes
historical transactions for ‘deal
premium’ paid on similar acquisitions)
• LBO modeling (measures the ‘IRR’
available for equity contributors post
debt repayment)
Note: These are the most popular
techniques used for valuing M&As and
hence there is little choice available to
discuss pros/cons
Other Methods
Other methods some of which are
‘academic’ in nature and not so popular
and hence best left in books.
Methods:
• First Chicago approach
• Contingent claim valuation
• Edwards, Bell & Ohlson model
• Dividend discount model
• Liquidation value approach
• Replacement cost approach
• Sum Of The Parts Valuation (SOTP ) or
Multi-business valuation
Best Valuation Method

▪ There is no best method. Apart from the pros/cons, each method is designed to suit: investment horizon, investment type, market
conditions, sector, scenario and so on.
▪ Investment Horizon & Valuation
Investment Horizon i.e. Short Term or Long term investor is typically interested in determining fair value between quarterly results. Although DCF provides an intrinsic
value, in the short run, share prices may be very volatile and DCF will not help such an investor in any way. Hence, short term investors (speculators/traders) must rely
on trends, sentiments and news to determine valuation. These factors are best captured in the Comparables Method (Relative Valuation). On the other hand, long term
investors rely on DCF, as it goes beyond the short term trend and provide true potential of an investment.

▪ Market Conditions & Valuation

Bullish & Bearish Markets call for different valuation strategies and hence different methodologies. In bullish markets, many shift from DCF to Comparables in the
pretext that ‘DCF fails to capture that the market as a whole has moved to a higher level’. However, they fail to recognize that without DCF, the valuation is ‘floating’
and is no longer tied to an intrinsic value. The opposite prevails in case of bearish markets, when analysts rely on DCF, now claiming that Comparables understate
valuation.

▪ Investment Type & Valuation

Financial investments are made in the secondary market where one relies on secondary data with the idea of liquidating the investment at some point in the horizon
instead of generating regular returns from the capital itself. On the other hand, Strategic investments are the ones made as part of ‘Corporate Finance’ and hence data
availability is not an issue and the investor may go for primary research when more data is required. Needless to say, the funds involved & research carried out is more
intense.
Bottom-line: For a Financial Investment one may choose a Market / Income / Asset based valuation approach. However, in case of Strategic Investments one must rely
on an Income based approach backed by an asset valuation.

The best approach is what many call the ‘Valuation Football Field’. This involves determining fair value using all relevant approaches
followed by drawing an inference in terms of a fair value range. This approach also helps in using one method to ‘sanitize’ the other.
Best Valuation Method: Public vs Private

▪ Public Company Valuation

Public Companies, by law, must provide audited financial results on a regular basis to the public at large. That apart, they also may make available a host of
other investor friendly information in the form of industry trends, presentations, analyst meets & conference calls. Secondly, public companies get far more
coverage in the form of analyst reports, news, management guidance and interviews. All this makes the job of valuation an easier one. With such data
availability it is easier to use any of the valuation techniques with a high degree of reliability. For such companies, any of the valuation methodologies
discussed earlier may be used depending on the scenario and sector.

▪ Private Company Valuation

It must be noted that private company valuation is driven by a strategic purpose like Private Equity, Joint Ventures and M&As. For such purposes, traditional
financial investment driven methodologies will not be so effective. Simply because, strategic transactions are motivated by a ‘control factor’ i.e. the
power/authority to change business direction & strategies. This control commands a premium over normal ‘trading driven’ valuation approaches. Hence,
the Transaction Comparables approach (Precedent Transaction Analysis or Deal Comps) is more popular & relevant here. However, as for all scenarios, one
must use other approaches as well to determine a fair value range.

▪ Which valuation method results in the highest valuation?

Contrary to popular belief, the highest valuation is not driven by the method alone but market conditions & the sector as well. In general, Transaction
Comparables include a control premium and hence result in a higher valuation than other methods. Between DCF & Trading Comparables the results will
vary depending on various factors. For example, when valuing a cement company, DCF is likely to result in a higher valuation as compared to Trading
Comparables. However, the case reverses in the IT sector where Trading Comparables seem to ‘inflate’ value. This is caused because the market at large
believes that DCF fails to capture value in some sectors while Comparables fail in others.

In short, Transaction Comparables result in highest valuations. While, in Bull markets Comparables result in higher valuations than DCF. The reverse holds
true in Bear markets. Unlike what many believe, DCF does not inflate value or result in highest value. The so called DCF inflation is a result of errors &
unrealistic assumptions as a consequence of oversimplification of the approach.
Best Valuation Method: Business-wise

▪ Start-ups
Startups are driven by far too many factors to be captured by simplistic valuation models. Their sensitivity to economic, sector specific and company specific factors must
be captured as far as possible to reasonably value them. These factors can only be captured with the DCF method.

▪ Matured Companies
Matured Companies have fairly predictable financials and hence DCF will result in a fairly reliable valuation. However, the Dividend Discount Model will also work reliably,
as matured companies have nominal expansion needs and hence a high dividend payout ratio along with predictability of growth rates. E.g. Large FMCG companies.

▪ IPO Valuation
Although for such situations it is best to use DCF as it determines the intrinsic value, not many will want to use it as it is likely to understate value as against Comparable
valuation. Simply because, the idea behind an IPO is to raise maximum possible capital for a minimum dilution in equity. Hence most IPOs come out in bull markets where
valuations are already stretched and Comparable Valuation will result in higher values as compared to DCF. Consequently, one may notice that IPOs are demand driven
rather than intrinsic value led, as a result many average companies get extraordinary valuations.

▪ High Growth Companies

High growth companies have drastically changing market shares and hence it is very difficult to compare them with a benchmark, making comparable valuation difficult
and leaving one to go with the DCF approach. E.g. Telecom companies.

▪ Cyclical Companies
Cyclical Companies, by virtue, have a very high degree of uncertainty. Secondly, such companies are always on the radar for news & management comment both of which
are immediately reflected in Comparables. On the other hand, DCF may have to wait for a quarter or more to reflect a change. E.g. Sugar companies.

▪ Distressed Companies
Distressed company valuation, is particularly tricky as the challenge lies in finding fair value and not the lowest value. By distressed, we mean loss making companies or
those that are restructuring their businesses by selling off ‘toxic assets’ and toning down capital structure. Traditional valuation approaches fail miserably as a result of the
uncertainty involved and this is where Liquidation Value & Replacement cost method come into the picture. Liquidation Value measures return from selling off or
liquidating the assets while Replacement Cost measures the opportunity cost of setting up a business. E.g. Textile companies.
Best Valuation Method: Sector-wise

▪ Basic materials
Steel & Cement represent basic/building materials. The sectors are cyclical (driven by expansion cycles). Being cyclical, in normal/bullish scenarios, Comparables
approach is best suited. However, in downturns it is better to shift to Asset based approaches to reflect maximum downside potential.

▪ IT & ITes
IT & ITes companies have very complicated business models where revenues are scattered and unpredictable, face constant threat of protectionism and so one simply
cannot have liable long term forecast. Hence Comparables is chosen over DCF by most. However, the use of DCF in very bullish/bearish markets is suggested.

▪ Telecom
The Telecom sector has rich & abundant data availability to generate very reliable numbers over a 3-5 year horizon and the business model can be very easily broken
down into a flow of numbers. For this reason it is recommended to use the DCF approach. However, many analysts use Comparables to provide short term targets.

▪ Healthcare / Hospitality
Like telecom, these sectors too can be very easily broken down into a logical flow of numbers resulting in a reliable medium-long term forecast. Hence DCF is a rational
choice. However, asset based approaches are a must in bearish markets to determine ‘worst case scenario’ valuation.

▪ Core Sectors
Infrastructure, Power and Oil & Gas together form the core sector. These sectors are primarily driven by government policy and funding, the details of which are clearly
made available. Having distinct drivers along with rich data availability make it a perfect DCF candidate. Meanwhile, asset valuation should also be used as a support.

▪ Retail
Although appearing to be simple, this is one of the most complicated sectors to value. The complexity is a result of distant breakevens, multiple formats, complex
funding provisions (debt/lease/cash) and uncertain demand. This leads to a hybrid valuation approach often called SOTP Valuation.

▪ Conglomerates / Multi Businesses

SOTP valuation, is not an altogether different valuation methodology but just a combination of two or more traditional ones. The idea being, in case of a multi-business
firm, certain business units may be better off valued using DCF while others may be valued using Comparables while some maybe valued with an asset based approach.
The result of each, shall be summed-up to determine the value of the firm as a whole. SOTP can be used for multiple business units or multiple subsidiaries.
General Concepts

▪ Why do share prices move up?

There are two broad factors affecting share prices
1.) Fundamental performance of the company - Growth and quality/sustainability of Cash flows, excess return over cost of funds (Economic Profit or EVA)
2.) Market Sentiments - Market sentiments may be influenced by overall performance of the Economy, Institutional holding, Government policy, Sector performance,
Promoter holding, Management quality etc. The points above can be combined to suggest that share prices will move up only when performance (fundamentals) is
greater than expected returns (sentiments). ‘Running faster than the expectations Treadmill’ - Mckinsey - .

▪ Can we forecast sentiments?

It is like asking how many people will want to buy/sell a stock at a given point. As mentioned above there are lot of factors affecting sentiments and it is very difficult to
understand how the market will react to each such factor. Although, technical analysts claim to do so, it is yet to be proven and therefore it remains a controversial
subject.

▪ What about market expectations?

Unfortunately, sentiments drive expectations. At best, a snapshot of market expectations can be taken by getting Consensus estimates (available on websites
/databases like Bloomberg, Thomson-Reuters etc.) However, one cannot forecast this aspect and hence beating the street remains the biggest challenge for asset
managers.

▪ Any proof that other methods of valuation work?

According to a study conducted by Tom Copeland, a correlation of 80% was found between DCF and current market price.

▪ Wealth maximization or profit maximization?

Profits are not the only source of financial rewards to the shareholders. They may also benefit from capital appreciation as a result of selling their stocks at a higher
price. As a result the profit maximization motive fails in comparison to wealth maximization (includes also sources of wealth).

▪ How does a company create wealth?

To achieve this goal the company must strive to generate a return over its cost of funds while beating (or at least matching) market expectations. The spread between
the returns over funds and cost of such funds is called Economic Profit (EVA).
General Concepts

▪ What does economic profit mean?

Economic Profit = (ROIC - WACC ) x Invested Capital
EVA in the equation above, ROIC represents the return on capital while WACC reflects the cost of the same. For a firm to grow and reward its stakeholders its return on
funds must always be higher that the cost.

▪ So when does DCF come into the picture?

A Discounted Cash Flow Valuation aims to arrive at the ‘Intrinsic Value’ of a company by discounting the forecasted free cash flows at a rate = cost of generating such
cash flows.

▪ Why discount cash flows?

As discussed, the goal of a company is to generate wealth for its owners (Shareholders) and not profit maximization. The method is based on the belief that ultimately
what can be distributed to shareholders is cash.

▪ Why is it considered more scientific?

Shareholder wealth will be maximized as a result of cash inflow through cash/stock dividends and capital appreciation. However, paying dividends implies that the
company has lesser internal cash to reinvest as a result it will need to borrow/raise more, causing the Share price to come down by that much. On the other hand
capital appreciation, in the long run is related to company fundamentals. This also explains why growing companies pay less or no dividends as compared to
stable/mature ones.

▪ Why not discount dividends?

Firstly, not all companies pay dividends. Secondly, dividends reduce internal cash resulting in a reduction in its share price (although for mature companies, as a result
of lesser reinvestment needs dividends are believed to increase shareholders’ wealth).

▪ Will DCF give an accurate value per share?

Value per share as arrived at using DCF is just as good as the quality of forecasts. Although there are several approaches to scientifically forecast the performance one
must remember that a forecast, by virtue is based on certain assumptions, which are specific to every company/analyst. Although companies often aim to standardize
such assumptions, they are still a set of assumptions.
General Concepts

▪ Is DCF the best method to arrive at Fair Value?

As mentioned earlier, there is no ‘best’ method. Share prices, in the long run will revert to fundamental performance of the company in question. However, prices are
also driven by sentiments which are not captured in DCF. This is where Comparables come to the rescue, it not only captures sentiments but is also better suited
between quarterly results. Hence DCF and comparables are said to be complimentary.

▪ Should one forecast cash flows directly?

Cash Flows are the most important component within the DCF equation and hence the quality of forecasts will ultimately decide the reliability of the Intrinsic Value
thus arrived at.
Although academicians suggest that cash flows must be directly forecasted, such a practice will yield unreliable results in real world situations.
The lifeblood of a company is sales and hence it is a very critical item while forecasting cash flows. Secondly a detailed COGS & Capex build up cannot be ignored. Put
Simply, free cash flows are an outcome of a detailed financial-cum-business model. Directly forecasting them will result in little credibility to the final output.

▪ What is Discounting? And why must it be used?

Discounting flows from the concept of ‘Time Value of Money’. Put simply, it means the value of money deteriorates with time as a result of risk/uncertainty. To
determine ‘Present Value’ of a future cash flow one must discount it by the cost of funds raised to generate the cash flows.

▪ How is the discount rate calculated?

The estimation (not calculation) of the discount rate firstly depends on the type of DCF method used, following which, one must estimate the opportunity cost of the
capital contributors (i.e. depending on the type of DCF method used the discount rate will vary). Following the principle of consistency one must identify all
contributors to the specific cash flow model
General Concepts

▪ Methods within DCF?

Contrary to popular belief, all 4 methods within DCF must result in the absolutely same Value per Share. However, capital structure and beta prevent this from
happening. Therefore, it is futile to compare/use two different DCF approaches simultaneously.
1.) Enterprise DCF - The method aims to forecast operating cash flows for firm (i.e. available to all capital contributors), subtract the Present Value of all Non-Equity
items and add back all nonoperating excess cash/cash equivalent items. The discount rate hence must be the WACC.
2.) Equity DCF - Theoretically the easiest of all, but practically the method poses several challenges and hence loses out to the Enterprise method in popularity. As the
name suggests, Cash Flows to Equity holders are calculated and hence discount factor is the ‘Cost of Equity’.
3.) Adjusted Present Value - Recommended for use in special situations like LBOs.
4.) Economic Profit Method - Uses EVA to validate the Enterprise DCF approach.

▪ When would we not use a DCF in a Valuation?

We do not use a DCF if the company has unstable or unpredictable cash flows (tech or bio-tech startup) or when debt and working capital serve a fundamentally
different role. For example, banks and financial institutions do not re-invest debt and working capital is a huge part of their Balance Sheets - so we wouldn't use a DCF
for such companies.

▪ Would an LBO or DCF give a higher valuation?

Technically it could go either way, but in most cases the LBO will give you a lower valuation.
Here's the easiest way to think about it: with an LBO, we do not get any value from the cash flows of a company in between Year 1 and the final year – we are only
valuing it based on its terminal value.
With a DCF, by contrast, we are taking into account both the company's cash flows in between and its terminal value, so values tend to be higher.
Note: Unlike a DCF, an LBO model by itself does not give a specific valuation. Instead, we set a desired IRR and determine how much we could pay for the company (the
valuation) based on that.
General Concepts

▪ What we use in conjunction with Free Cash Flow multiples - Equity Value or Enterprise Value?
For Unlevered Free Cash Flow, we would use Enterprise Value, but for Levered Free Cash Flow we would use Equity Value.
Remember, Unlevered Free Cash Flow ignores Interest and thus represents money available to all investors, whereas Levered already accounts for Interest and the
money is therefore only available to equity investors. Debt investors have already "been paid" with the interest payments they received.

▪ Levered vs. Unlevered cash flows

There are two ways of projecting a company’s Free Cash Flow (FCF): on an unlevered basis, or on a levered basis.
A levered DCF projects FCF after Interest Expense (Debt) and Interest Income (Cash) while an unlevered DCF projects FCF before the impact on Debt and Cash. A
levered DCF therefore attempts to value the Equity portion of a company’s capital structure directly, while an unlevered DCF analysis attempts to value the company as
a whole; at the end of the unlevered DCF analysis, Net Debt and other claims can be subtracted out to arrive at the residual (Equity) value of the business.

▪ Why we use unlevered free cash flow (UFCF) vs. Levered free cash flow (LFCF)?
UFCF is the industry norm, because it allows for an apples-to-apples comparison of the Cash flows produced by different companies. A UFCF analysis also affords the
analyst the ability to test out different capital structures to determine how they impact a company’s value. By contrast, in an LFCF analysis, the capital structure is taken
into account in the calculation of the company’s Cash flows. This means that the LFCF analysis will need to be re-run if a different capital structure is assumed.
In effect, UFCF allows the analyst to separate the Cash flows produced by the business from the structure of the ownership and liabilities of the business. In a UFCF the
Cash flows of the business are projected irrespective of the capital structure chosen in a UFCF analysis; the exact capital structure is not taken into account until the
Weighted Average Cost of Capital (WACC) is determined.
General Concepts

▪ What are multiples?

Multiples are ratios used to gauge the degree to which a stock is over/under valued. By themselves, they are of no significance. However, when compared to a set of
similar companies a lot may be revealed. As mentioned earlier they are used both in Trading and Transaction comparables.
Multiples are of two main types; Equity and Enterprise
Types of Equity multiples P/E, PE/G, M/B (or P/B) etc. Types of Enterprise Multiples EV/Sales, EV/EBITDA, EV/EBIT etc.

▪ What are some examples of industry-specific multiples?

Technology (Internet): EV / Unique Visitors, EV / Pageviews
Retail / Airlines: EV / EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization & Rent)
Real Estate Investment Trusts (REITs): Price / FFO, Price / AFFO (Funds From Operations, Adjusted Funds From Operations)

▪ How are multiples used?

A sector average (or weighted average) is calculated as a benchmark on a Last twelve month (LTM) or ‘Forward’ basis, to which the company in question is compared,
thus determining whether it is over/under valued.

▪ Do we always use the median multiple of a set of public company comparables or precedent transactions?
There's no "rule" that we have to do this, but in most cases we do because we want to use values from the middle range of the set. But if the company we are valuing
is distressed, is not performing well, or is at a competitive disadvantage, we might use the 25th percentile or something in the lower range instead - and vice versa if
it's doing well.

▪ Are they more popular than DCF?

Yes. The approach, as a result of it’s (believed) ease of application, flexibility and reach is far more popular than any other. However, to make it real world ready it
needs some serious research and enhancements.
General Concepts

▪ Why can't we use Equity Value/EBITDA as a multiple rather than Enterprise Value/EBITDA?
EBITDA is available to all investors in the company - rather than just equity holders. Similarly, Enterprise Value is also available to all shareholders so it makes sense to
pair them together.
Equity Value / EBITDA, however, is comparing apples to oranges because Equity Value does not reflect the company's entire capital structure - only the part available to
equity investors.

▪ The EV/EBIT, EV/EBITDA, and P/E multiples all measure a company's profitability. What's the difference between them, and when do you we each one?
P/E depends on the company's capital structure whereas EV/EBIT and EV/EBITDA are capital structure-neutral. Therefore, we use P/E for banks, financial institutions,
and other companies where interest payments / expenses are critical.
EV/EBIT includes Depreciation & Amortization whereas EV/EBITDA excludes it – we are more likely to use EV/EBIT in industries where D&A is large and where capital
expenditures and fixed assets are important (e.g. manufacturing), and EV/EBITDA in industries where fixed assets are less important and where D&A is comparatively
smaller (e.g. Internet companies).

▪ How do we value banks and financial institutions differently from other companies?
We mostly use the same methodologies, except:
We look at P/E and P/BV (Book Value) multiples rather than EV/Revenue, EV/EBITDA, and other "normal" multiples, since banks have unique capital.
We pay more attention to bank-specific metrics like NAV (Net Asset Value) and we might screen companies and precedent transactions based on those instead. Rather
than a DCF, we use a Dividend Discount Model (DDM) which is similar but is based on the present value of the company's dividends rather than its free cash flows.
We need to use these methodologies and multiples because interest is a critical component of a bank's revenue and because debt is part of its business model rather
than just a way to finance acquisitions or expand the business.