Comparative Analysis of Business Valuation Methods: A Practical Examination Using Discounted Cash-Flow and Economic Value-Added Approaches

Abstract

This study responds to inquiries regarding the practicality of valuation methods, focusing particularly on the Discounted Cash Flow (DCF) and Economic Value Added (EVA) approaches, employing a real company as the subject of valuation. The research highlights the DCF method’s viability in real-world applications, emphasizing its market standard status and pivotal role in company valuation from an investor’s perspective. Despite its complexity, the DCF method is lauded for its ease of use, time efficiency, and forward-looking perspective. Recognizing the subjective nature of valuation procedures, the study acknowledges the ability to influence value as a recognized risk, but it is essential for informed investment decisions. Conversely, while EVA is recognized as an intriguing theoretical approach, a gap between its theoretical promise and practical application is revealed, particularly in the case of small and medium-sized businesses (SMEs). Despite its structural practicality, EVA is underutilized in real-life scenarios. A comparison between DCF and EVA suggests that the former is more time-efficient and commonly used for investment purposes, with existing calculation templates enhancing its appeal. Despite underlying assumptions, the DCF method remains relevant and holds significant weight in company valuations, standing out as the preferred method alongside multiples.