Strategic Performance Management and Business Valuation · Fundamentals of Business Valuation

Approaches to Valuation: Asset, Income and Market

Updated 11 October 2026 · Fact-checked

The three valuation approaches are asset (value the business from what it owns less what it owes), income (value the future cash flows or earnings it will produce) and market (value it from prices of similar businesses). To solve a question, pick the approach the facts support, apply its method, then state its limits.

Understand Approaches to Valuation: Asset, Income and Market

Every valuation answers one question: what is this business worth to a buyer or owner? There are only three places to look for the answer. You can look at what the business owns, what it earns, or what similar businesses sell for. These are the asset approach, the income approach and the market approach.

The asset approach values the business through its balance sheet. The main method is Net Asset Value (NAV): value of assets minus outside liabilities. Assets can be taken at book value, or restated to fair value (adjusted net asset method), or at replacement cost. A related view is liquidation value, used when the business will be closed. This approach suits holding companies, investment companies, real estate firms and businesses in distress. It is weak for a profitable firm whose worth lies in brands, people and know-how that are not on the balance sheet.

The income approach values the business as the present value of the benefits it will generate. The main methods are Discounted Cash Flow (DCF), capitalisation of maintainable earnings and the dividend discount model. It suits going concerns with predictable earnings. Its weakness is that it depends on forecasts and the discount rate. A small change in growth or discount rate moves the value a lot.

The market approach values the business by comparing it with others. The main methods are the comparable companies method (listed peers), the comparable transactions method (past deals) and the use of multiples such as P/E, EV/EBITDA and P/B. It is quick and reflects what the market actually pays. Its weakness is finding truly comparable firms, and market prices can be distorted by sentiment or by illiquidity in unlisted shares.

No approach is best in every case. The choice depends on the purpose of valuation, the nature of the business, the data available and the premise of value. Good practice is to use more than one approach and reconcile the results.

Key rules to remember

Net Asset Value (NAV): NAV = Value of assets − Outside liabilities (including preference capital, if any, ranking before equity); Use fair values for the adjusted method. Exclude fictitious assets such as preliminary expenses and accumulated losses shown as assets.
NAV per equity share: NAV per share = (Assets − Outside liabilities − Preference capital) ÷ Number of equity shares; Check whether the question wants value of the business or value per share.
Capitalisation of maintainable earnings: Value = Future maintainable profit ÷ Capitalisation rate; Use profit after adjusting for non-recurring items. The rate is the required rate of return.
Discounted Cash Flow: Value = Σ [CFt ÷ (1 + r)^t] + Terminal value ÷ (1 + r)^n; Terminal value by Gordon growth = CFn+1 ÷ (r − g), valid only when r > g.
Equity value from enterprise value: Equity value = Enterprise value − Debt + Cash and surplus assets; Needed when a multiple such as EV/EBITDA or free cash flow to firm is used.
Value using a multiple: Value = Peer multiple × Subject company's metric (e.g. P/E × EPS); Peers must be similar in size, risk, growth and business.

How to solve Approaches to Valuation: Asset, Income and Market questions

Use this order for any question on valuation approaches, whether it asks for a calculation, a comparison or a recommendation.

1Read the purpose and premise: sale, merger, tax, insolvency or fundraising; going concern or liquidation.
2Note the nature of the business and the data given: balance sheet, profit history, forecasts or peer data.
3Choose the approach the data and purpose support, and say why in one line.
4Apply the method cleanly: show adjustments to assets, normalisation of profit, or the discounting table.
5Convert to the figure asked: equity value, enterprise value or value per share. Deduct debt and preference capital where needed.
6State the merits and limits of the approach as they apply to this case.
7If more than one approach is possible, compare results and give a reasoned final value or range.

Quickest way: Match the approach to the facts

When to use it: For MCQs and short theory questions asking which approach suits a given business.

Asset-heavy, investment holding, or closing down: asset approach (NAV or liquidation value).
Stable or forecastable cash flows, going concern: income approach (DCF or capitalisation).
Listed peers or recent deals exist, quick estimate needed: market approach (multiples).
Start-up with no profits: market multiples on revenue, or DCF with explicit assumptions, not NAV.
If the question gives only balance sheet data, compute NAV first, then comment.

Common mistakes in Approaches to Valuation: Asset, Income and Market

Using book values in NAV without adjusting for fair value or fictitious assets.
Students copy the balance sheet totals directly.
Fix: Remove fictitious assets, revalue assets given in the question, and add omitted liabilities before computing NAV.
Forgetting to deduct preference capital before finding value per equity share.
Preference shares sit in the capital side and look like equity.
Fix: Deduct preference capital (and arrears if stated) from net assets before dividing by equity shares.
Capitalising profit without normalising it.
Students use reported profit as given.
Fix: Remove one-off gains and losses, and adjust for abnormal items before dividing by the capitalisation rate.
Applying the Gordon growth terminal value when growth is not below the discount rate.
The formula is used mechanically.
Fix: Check that r > g. If not, the model is invalid and growth assumptions must be revisited.
Mixing enterprise value and equity value when using multiples.
EV/EBITDA gives enterprise value, but students stop there.
Fix: Subtract debt and add cash to reach equity value, then divide by shares if needed.
Saying one approach is always best.
Students memorise DCF as the theoretically sound method.
Fix: Tie the choice to purpose, business type and data. Mention the limit of the chosen approach and cross-check with another.

Worked examples

Example 1

Sundaram Traders Ltd has the following at book values: land ₹40,00,000, plant ₹30,00,000, stock ₹12,00,000, debtors ₹8,00,000, cash ₹5,00,000, preliminary expenses ₹1,00,000. Liabilities: creditors ₹10,00,000, bank loan ₹20,00,000. Preference capital is ₹10,00,000. Land has a fair value of ₹55,00,000 and 20% of debtors are doubtful. There are 50,000 equity shares. Find the NAV per equity share.

Show the solution

Fictitious asset: preliminary expenses of ₹1,00,000 are excluded.
Land at fair value: ₹55,00,000.
Plant ₹30,00,000, stock ₹12,00,000, cash ₹5,00,000 stay at book value.
Debtors after provision: ₹8,00,000 − 20% of ₹8,00,000 = ₹6,40,000.
Total assets = 55,00,000 + 30,00,000 + 12,00,000 + 6,40,000 + 5,00,000 = ₹1,08,40,000.
Outside liabilities = 10,00,000 + 20,00,000 = ₹30,00,000.
Net assets = 1,08,40,000 − 30,00,000 = ₹78,40,000.
Less preference capital ₹10,00,000 = ₹68,40,000 for equity.
NAV per share = 68,40,000 ÷ 50,000 = ₹136.80.

Answer: NAV per equity share = ₹136.80.

Example 2

Kaveri Foods Ltd has maintainable post-tax profit of ₹60,00,000 a year. A similar listed company trades at a P/E of 12, but because Kaveri is unlisted and smaller, you decide to apply a 25% discount for illiquidity and size. Kaveri's net assets are ₹3,50,00,000. Value the equity by the market approach and by capitalisation at 15%, and comment.

Show the solution

Market approach: equity value before discount = 12 × ₹60,00,000 = ₹7,20,00,000.
Discount 25% = ₹1,80,00,000, so value = ₹5,40,00,000.
Income approach: capitalised value = 60,00,000 ÷ 0.15 = ₹4,00,00,000.
Asset approach for reference: NAV = ₹3,50,00,000.
Comment: NAV is lowest as it ignores earning power. The capitalisation value of ₹4,00,00,000 rests on the 15% required return. The market value depends on the peer's P/E and the discount judgement.
The values lie between ₹3.5 crore and ₹5.4 crore. For a going concern, a range of ₹4,00,00,000 to ₹5,40,00,000 is reasonable, with the reason for the final pick stated.

Answer: Market approach ₹5,40,00,000; income approach (capitalisation) ₹4,00,00,000; NAV ₹3,50,00,000. For this profitable going concern, give a reasoned value within ₹4,00,00,000 to ₹5,40,00,000.

Exam tips

In MCQs, the question usually tests suitability: match the business type to the approach.
In numerical questions, show every adjustment line by line so you earn marks even if one figure is wrong.
Always state the premise (going concern or liquidation) in the first line of your answer.
For theory, give merits and demerits in a short two-column style list and finish with when the approach fits.
If the question asks for a recommendation, give a final value or range and the reason, not just three separate numbers.

Practice questions from Fundamentals of Business Valuation

Approaches to Valuation: Asset, Income and Market in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Approaches to Valuation: Asset, Income and Market: frequently asked questions

What is the difference between asset-based and earnings-based valuation?

Asset-based valuation values the business from its assets less liabilities, so it looks at what the firm owns today. Earnings-based valuation, part of the income approach, values the profits or cash flows the firm is expected to generate. The first suits asset-heavy or closing businesses; the second suits going concerns.

DCF vs comparable company method: which is better?

Neither is always better. DCF captures the specific cash flows and risk of the business but relies on forecasts and the discount rate. The comparable company method is quicker and market-based but needs truly similar peers. Use one as the main method and the other as a cross-check.

What is the net asset value method of valuation?

It values the business as total assets minus outside liabilities, usually after restating assets to fair value and removing fictitious assets. Dividing by the number of equity shares, after deducting preference capital, gives NAV per share.

What are the limits of the market approach for unlisted companies?

Finding comparable firms is hard, and unlisted shares lack liquidity. Analysts often apply a discount for lack of marketability or size. Peer multiples can also carry market sentiment that does not suit the subject company.