As the second part of our new ‘Finance 101’ series, this article explains the main methods used to value companies and the mechanics behind an initial public offering, commonly known as an IPO. It will then apply these ideas to the SpaceX IPO, which happened on 12 June.

What is an IPO?

An initial public offering (IPO) occurs when a private company decides to “go public”, which means that it is listed (or “floated”) on the stock market. This is usually done to raise capital for future investment and growth, by issuing new shares that members of the public can buy.

It also increases a company’s visibility, strengthens its public profile and gives early investors and employees an easier way to sell their shares. A successful IPO can increase a company’s market value by increasing the price of its shares.

However, there are some disadvantages in taking a company public. First, public companies are required to publish extensive financial and operational information so that investors can make informed decisions. While this improves market transparency, it can also reveal sensitive information and weaken its advantage against competitors.

A second disadvantage is that public companies have to comply with extremely strict regulations, including publishing quarterly reports. These obligations make running the business more costly and time-consuming.

How are companies valued?

Before an IPO can happen, companies and their investment banks use valuation methods to estimate the financial worth or value of the business, while investors may use the same methods to judge whether the company is worth investing in.

Companies can be valued using several methods, including comparisons with similar businesses (market-based approach), projections of future cash flows (discounted cash flow) and calculations based on the value of their assets (asset-based approach).

This allows investors, buyers and sellers to make informed decisions, whether that’s deciding to invest, negotiating a sale or pricing shares ahead of an IPO.

A market-based approach values a company by comparing it with similar businesses that are already publicly traded. It uses financial ratios, also known as valuation multiples, to examine how the market values companies within the same industry.

One common example is price-to-earnings ratio (P/E ratio), which compares the company’s market value with its annual profit. Companies operating within the same industry often trade within a similar range of P/E ratios.

For example, in agriculture the value of a company is usually not far from what it earns per year. Thus, the price-to-earnings ratio is generally closer to one.

Therefore, we could use this information to value a company. For instance, if a company growing wheat earns $100m per year we could estimate that its value would be around the same number, also $100m.

A discounted cash flow (DCF) analysis values a company by estimating the cash it is expected to generate in the future and bringing them back to today’s value through a discount rate. Essentially, this approach accounts for inflation, the time value of money, and risk.

Because this method can also be applied to tangible assets that are sold on markets, the example of a house provides a simple example of how it works. Rather than valuing the land, location and amenities separately, an investor can estimate the house’s value by looking at the rental income it may generate over time.

Each of those future rent payments is then discounted back to today’s dollars, and adding them together gives an estimate of the house’s current value – to provide further perspective, the discount rate typically utilised for commercial property deals usually fluctuates within a standard bracket of 5% to 12%.

An asset-based approach values a company by examining the assets (what it owns) listed on its balance sheet, calculating how much they could be sold for and and subtracting what the company owes.

For example, take a real estate company. We can estimate its value by adding together the market value of all of its houses, vehicles, offices, cash and other assets. Importantly, we must also deduct any liabilities, such as debt, outstanding payments and future costs. The amount remaining would provide the company’s net asset value.

 

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Who decided that SpaceX is worth $1.8 trillion?

Elon Musk’s aerospace tech company SpaceX is a useful example to bring these methods together, because it recently went from private to public through an IPO.

While it was private, no one officially decided its worth; its value was implied each time private investors bought or sold shares. A private share sale in 2024 valued the company at around $350bn; another, in December 2025, valued it at $800bn.

On 12 June, SpaceX went public with its IPO price valuing the company at $1.8tn – the largest IPO in history. After its shares began trading, investor demand pushed its market value to a historic $2tn on its first day, making Musk the world’s first trillionaire.

However, this is an estimate, not a fact. A market-based approach showed SpaceX trading at 67 times its sales, looking expensive, while a DCF approach valued it at only $780bn. Therefore, the real lesson is that there is no single correct value.

Each method depends on different assumptions and who decides always comes back to whoever is willing to transact. The reason for such large spreads of valuation lies in the fact that there are very few companies that deal with launching rockets into space. Compared to other fields with thousands of companies, SpaceX is a first.

Since the IPO, SpaceX’s share price has demonstrated how quickly that judgement can change. After rising above $225 shortly after its debut, the shares fell back towards their $135 IPO price by mid-July, wiping hundreds of billions from the company’s peak market value.