Would the price earnings ratio valuation method

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Reference no: EM133269706

Question - Company A is a high-tech start-up company that produces Artificial Intelligence software that can help companies fine-tune their digital marketing campaigns to bring in more results. After two years of developing the software, Company A has just completed one full year of software sales on a commercial basis. Both profits and cash flows just barely turned positive as the company is only beginning to gain traction, and revenue is still tiny. The management of Company A is optimistic that income and profits will grow exponentially in the next few years.

Company A is at the point where more capital is needed to fund its growth. It has begun talks with a Venture Capital company, which suggests that they would value the company based on the Price Earnings (PE) ratio multiplied by its latest historical Net Income. It is willing to be generous in valuing Company A at the same PE as similar listed companies.

CEO of Company A , however, felt that perhaps the company could get a better valuation if they were to base it on a discounted cash flow method, valuing Company A's cash flows in the coming years.

Would the Price Earnings ratio valuation method or the discounted cash flow method be a better valuation method in this case?

Reference no: EM133269706

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