Valuation is generally performed for profit generating companies. However, investors often come across situations wherein loss-making companies must be valued. These are companies that are either in early stages of their development like startups or are larger but are facing near term loss generating issues. One of the following approaches can be taken in such cases:

1)     DCF method

This method requires forecasting cash flows in the future and performing a DCF. This is the most thorough approach but forecasting cash flows into the future is much harder to do.

2)     Comparables approach

In this method, valuation metrics based on other parameters apart from profits, such as revenues, can be used. These metrics are taken from publicly traded companies or from implied multiples in recently completed transactions. In some cases, if revenues of the target company are also not being generated, then metrics based on value drivers such as number of subscribers (in the case of internet companies are used).

3)     Cost of capital approach

In this approach, the total capital invested so far is taken and an appropriate return is calculated on the amount invested so far. Another way of doing this may be by applying a multiple on the Shareholder’s equity.

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