The three main valuation approaches: market, income and cost

There is no single valuation formula that is automatically correct for every company and every purpose. International valuation practice commonly distinguishes three principal approaches: market, income and cost.

1. Market approach

The market approach asks what investors are paying for comparable businesses or assets. Common tools include EV/EBITDA, EV/EBIT and P/E multiples.

The challenge is comparability. Growth, risk, margins, capital intensity, customer concentration and financing can differ substantially even within the same industry.

2. Income approach

The income approach starts from the economic benefits the asset is expected to generate. The best-known method is DCF — discounted cash flow valuation.

DCF estimates future cash flows and discounts them back to present value at a rate reflecting risk. It is conceptually strong but sensitive to assumptions.

3. Cost approach

The cost or asset-based approach focuses on the value of assets less liabilities, with adjustments to market value where appropriate.

It can be especially relevant for property, investment or asset-intensive companies, or where operating cash flow does not adequately capture the value of the underlying assets.

Which is best?

No approach is universally best. The appropriate method depends on the nature of the business, the purpose of valuation and the quality of available information. Using more than one approach can be helpful if the differences are understood rather than averaged mechanically.

International standards

The International Valuation Standards identify the market, income and cost approaches as the principal valuation approaches and emphasise selecting methods appropriate to the purpose and circumstances of the valuation.

GlobalTaxAI approach

GlobalTaxAI primarily uses a DCF/FCFF income approach for company valuation, supported by an asset-based cross-check and relevant market benchmarks.