The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit (Little Books. Big Profits)

by Aswath Damodaran

What do you scale value to? Young companies often lose money (both net income and EBITDA are negative), have little to show in terms of book value, and have miniscule revenues. Scaling market value to any of these variables is going to be difficult. What are your comparable companies? Even if a young company operates in a sector where there are many other young companies, there can be significant variations across companies. For young companies in mature sectors, the task will be even more challenging. How do you control for survival? Intuitively, we would expect the relative value of a young company (the multiple of revenues or earnings that we assign it) to increase with its likelihood of survival. However, putting this intuitive principle into practice is not easy to do.