Corporate Restructuring, Valuation and Insolvency · Overview of Business Valuation

Overview of Valuation Approaches and Methods

Updated 11 October 2026 · Fact-checked

Business valuation uses three approaches: the asset approach (value of what the business owns less what it owes), the income approach (present value of future earnings or cash flows) and the market approach (prices of comparable businesses). You choose the approach that fits the business, the purpose and the data available.

Understand Overview of Valuation Approaches and Methods

A valuation answers one question: what is this business or share worth, for this purpose, on this date? There is no single true value. The answer depends on how you look at the business. That is why valuers use approaches.

An approach is a broad way of thinking about value. A method is a specific technique inside an approach. Think of the approach as the route and the method as the vehicle.

The asset approach looks at what the business owns and owes. You value assets and liabilities, then take the difference. Its main method is Net Asset Value (NAV), with variants such as the replacement cost and liquidation value methods. It suits asset-heavy companies, holding companies, companies being wound up and companies with no steady profits.

The income approach looks at what the business will earn. You forecast future cash flows or earnings and convert them into one present value using a discount rate or capitalisation rate. Its main methods are Discounted Cash Flow (DCF) and capitalisation of earnings. It suits going concerns with reasonably forecastable earnings.

The market approach looks at what others pay. You find listed companies or recent deals that are comparable, and apply their pricing multiples (such as price to earnings or EV to EBITDA) or their market prices to your business. It suits businesses with good comparables and reliable market data. In practice a valuer often uses more than one approach and reconciles the results, giving reasons for the weight given to each.

Key rules to remember

Net Asset Value (asset approach): NAV = Value of assets − Liabilities; Assets and liabilities are taken at the fair or adjusted values chosen for the exercise, not always at book values. Per share value = NAV ÷ number of equity shares.
Capitalisation of earnings (income approach): Value = Maintainable earnings ÷ Capitalisation rate; Use only when earnings are stable. The capitalisation rate is the required rate of return, adjusted for growth where relevant.
Discounted cash flow (income approach): Value = Σ [CFt ÷ (1 + r)^t] + Terminal value ÷ (1 + r)^n; CFt is the cash flow in year t, r is the discount rate, n is the last forecast year.
Market multiple (market approach): Value = Comparable multiple × Subject metric; Example: value = peer P/E × the company's maintainable earnings. Peers must be truly comparable.
Choosing the approach: Asset-heavy or loss-making or winding up → asset; stable forecastable earnings → income; good comparables → market; A guide, not a fixed rule. Purpose and data availability decide.

How to solve Overview of Valuation Approaches and Methods questions

Use this order for any question on choosing or applying a valuation approach. Case-based answers should follow provision or principle, analysis of facts, then conclusion.

1Identify the purpose of valuation (merger, sale, buyback, loan, liquidation) and the valuation date.
2List the key facts: nature of business, asset intensity, profit history, growth outlook, availability of comparables, and whether it is a going concern.
3State the three approaches briefly, with the main method under each.
4Test each approach against the facts and say whether it is suitable and why, naming what data is missing if any.
5Select the primary approach and say whether you will use another to cross-check.
6If numbers are given, apply the formula in clear steps and show the units (₹ crore, per share).
7Conclude with the value or recommendation, and mention that the valuer must document assumptions and rationale.

Quickest way: Three-question approach selector

When to use it: Use in short-note or case questions where you must pick an approach quickly.

Ask: is the business a going concern with predictable earnings? If yes, lead with the income approach.
Ask: are there listed or recently transacted comparables? If yes, add the market approach as a check.
Ask: is it asset-heavy, loss-making, a holding company or being liquidated? If yes, lead with the asset approach.
Write one line of reason for each choice and close with a cross-check statement.

Common mistakes in Overview of Valuation Approaches and Methods

Treating approach and method as the same thing.
Textbooks use the words loosely, and DCF or NAV is often called an approach.
Fix: Write the approach first, then the method under it: income approach, DCF method.
Using book values for NAV without adjustment.
Students copy balance sheet figures straight into the formula.
Fix: State that assets and liabilities are restated to fair value where required, and use the figures the question gives you for adjustment.
Applying market multiples from non-comparable companies.
Students see a P/E figure and use it without checking size, sector or risk.
Fix: Say that peers must be similar in business, size, growth and risk, and adjust or reject poor comparables.
Using the asset approach for a profitable going concern as the only method.
NAV is easy to compute, so it feels safe.
Fix: Explain that NAV ignores earning power and goodwill, so it is usually a floor or cross-check for such a business.
Giving a value without naming the purpose.
Students rush into calculation.
Fix: Open every answer with the purpose and the valuation date, since the best approach can change with purpose.
Claiming one approach is always correct.
Students memorise a single rule of thumb.
Fix: Use words like generally suits and depends on facts, and justify your choice from the case.

Worked examples

Example 1

Nilgiri Tea Estates Ltd owns large plantation land and machinery, earns irregular profits because of weather, and has no close listed peers. A buyer asks which valuation approach should lead. Advise.

Show the solution

Purpose: sale of the company to a buyer, so a fair price for the whole business is needed.
Facts: asset-heavy, irregular profits, no close comparables.
Income approach: earnings are irregular, so forecasts and a stable discount rate are hard to support. It is weak as the primary approach.
Market approach: no close listed peers, so multiples would not be reliable.
Asset approach: the business is asset-heavy and assets can be valued, so NAV on fair values is the most supportable.
Conclusion: lead with the asset approach, and use a simple income-based check if reasonable forecasts can be built.

Answer: The asset approach (NAV at fair values) should lead, with a limited income-approach cross-check. The market approach is not suitable for lack of comparables.

Example 2

Kaveri Software Ltd has maintainable annual earnings of ₹6 crore. A comparable listed peer trades at a P/E of 15. The company has 2 crore equity shares. Find the value under the market approach, and under the income approach by capitalisation of earnings at 12%. State the per share values.

Show the solution

Market approach: value = P/E × earnings = 15 × ₹6 crore = ₹90 crore.
Per share (market) = ₹90 crore ÷ 2 crore shares = ₹45.
Income approach: value = earnings ÷ capitalisation rate = ₹6 crore ÷ 0.12 = ₹50 crore.
Per share (income) = ₹50 crore ÷ 2 crore shares = ₹25.
Compare: the two differ widely, so check whether the 12% rate and the peer's P/E reflect similar risk and growth. A P/E of 15 equals a capitalisation rate of about 6.67% (1 ÷ 15), so the peer is priced for lower risk or higher growth.
Conclude that the valuer should reconcile the difference and document the weight given to each approach.

Answer: Market approach: ₹90 crore, or ₹45 per share. Income approach: ₹50 crore, or ₹25 per share. The gap must be explained and reconciled before a final value is stated.

Exam tips

Start every answer with the purpose of valuation. Examiners reward this because the approach depends on it.
Use the structure: approach, method, suitability, conclusion. Add a one-line reason for each choice.
In numerical questions, write the formula, then substitute, then state the unit and per share value.
Do not stop at naming the approach. Say why the other two are less suitable on the given facts.
Where valuation is for a regulated purpose, mention that it must be done by a registered valuer under the applicable rules.

Practice questions from Overview of Business Valuation

Overview of Valuation Approaches and Methods in other exams

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

Overview of Valuation Approaches and Methods: frequently asked questions

What is the difference between income approach and market approach?

The income approach values a business from its own expected future cash flows or earnings, discounted or capitalised to a present value. The market approach values it by reference to prices paid for comparable businesses. One looks inward at earning power, the other looks outward at the market.

How do I choose a valuation method for a company?

Start with the purpose, then check the facts. Stable forecastable earnings point to the income approach, good comparables to the market approach, and asset-heavy, loss-making or liquidating businesses to the asset approach. Often you use one as primary and another to cross-check.

Is DCF an approach or a method?

DCF is a method under the income approach. The approach is the broad idea of valuing future income. The method is the specific technique used to do it.

Can a valuer use more than one approach?

Yes. Using more than one approach and reconciling the results is common good practice. The valuer should record the reasons for the approaches chosen and the weight given to each.