When should you use market-based vs. asset-based valuation, and what are the key differences?

The choice between market-based and asset-based valuation depends on the type of company, data availability, and the purpose of the valuation. Here's a structured framework for CFA Level II.

Market-Based Valuation (Relative Valuation)

Uses multiples from comparable public companies or precedent transactions to estimate value. Common multiples:

• EV/EBITDA — Most widely used; eliminates capital structure differences
• P/E — Simple but distorted by leverage and accounting choices
• EV/Revenue — For high-growth or unprofitable companies
• P/B — For financial institutions and asset-heavy companies

Example: Thornberry Analytics, a private SaaS company, generates $18 million in EBITDA. Five comparable public SaaS firms trade at an average EV/EBITDA of 14.2x. The indicated enterprise value is:

EV = $18M x 14.2 = $255.6 million

Asset-Based Valuation (Net Asset Value)

Values the company as the sum of its individual assets minus liabilities, adjusted to fair market value. Used when:

• The company is asset-heavy (real estate, natural resources, investment holding companies)
• The company is liquidating or distressed
• Assets have readily determinable market values
• There are no reliable earnings to capitalize

Example: Grandview Holdings owns a portfolio of commercial properties. Asset-based valuation:

The book-to-fair-value adjustment adds $29M of unrealized appreciation.

Decision Framework:

Key Differences:

Exam Tip: The CFA Level II exam often presents a scenario where one approach is clearly more appropriate than the others. If the vignette describes a real estate holding company, asset-based is the answer. If it describes a profitable tech company with public peers, market-based is correct.

Explore equity valuation methods in our CFA Level II course.