There are three different approaches to valuating a company. Below is a brief description of these methodologies.

• Cost Approach: Values the company through its shareholders’ equity adjusted to market prices.

As the value of intangible assets is not reflected in the equity of most companies, this methodology tends to underestimate them and is not used in practice.

• Market Approach: Compares, indirectly, the value of companies similar to the evaluated company. It is known as the “multiples approach”.

First, a survey is made of a group of similar companies (same sectors, same markets) whose value is known, either because they are traded on the stock exchange or because they were recently traded for a publicly known value. Then, a statistical analysis is made, comparing the value of each of these with their respective financial indicators (eg: value ¸ net revenue, value ¸ EBITDA, value ¸ net profit, etc.) determining the typical multiples of the reference group. Finally, these multiples are multiplied by the indicators of the valuated company, thus reaching their value.

• Revenue (or Income) Approach: Valuate the company at the present (discounted) value of its expected future cash flow.

According to this methodology, the Equity Value corresponds to the current value of its projected free operating cash flow, discounted at rates that adequately reflect the actual remuneration expected by its capital providers, due to the risk associated with the industry and the company valuated.

Projected free operating cash flow is the net resources generated by the company’s operations for distribution to its capital providers (shareholders, debenture holders, long-term loan lenders and other components of the company’s capital structure).

The application of the method requires the determination of three main components:

• the Projected Free Operating Cash Flow, determined from a simulation model applicable to the company. This model considers the variables of an economic and financial nature that have the greatest impact on the formation of the company’s future cash flows;
• the Residual Value, which is the equity value at the end of the period under review;
• the Discount Rate, used to calculate the present value of future cash flow and residual value. This fee is usually determined by the internationally accepted method of Weighted Average Cost of Capital (WACC) which calculates, in proportion to the participation in the company’s capital structure, the opportunity cost of shareholders and the cost of capital of third parties.