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The most popular method for equity valuation is Dividend Valuation Models for the companies paying dividends and Earnings Valuation Models for companies with no dividend payout.
There are a number of Equity Valuation techniques. Each has merits and disadvantages:
Dividend Discount Model (DD): It is the most popular and suitable for "Public" Listed Firms. The main premise to DD is that the company has a track "historic record of dividend payment, hence, a closed entity with no public information about dividend payment or a company that has not historically paid dividends will not be suitable for using DD.
Price to Earnings Model (PE): where the PE ratio can be multiplied by the company "book" equity value to arrive at a market valuation. This is a relatively easy technique that can be used for a company having no public PE by using the PE ratio of a peer company with similar characteristics and within similar industry to multiply by the company book equity value to arrive at a quick market value. the word "similar" and "peer" are the key determinant for deciding whether a PE ratio can be used to evaluate another company.
Capital Asset Pricing Model (CAPM): suitable for public companies and uses the "Risk Free" rate of return, "Market" Rate and "Beta" (Degree of correlation of the company market price to a bench mark Market return) to arrive at a company market value per share.
Discounted Cash Flow Model (DCF): This is the most sophisticated and most popular in nowadays valuation. It involves heavy assumptions about "Future' cash flows to arrive at "expected" Free Cash Flows and, using an appropriate "Discount Rate" (usually the Weighted Average Cost of Capital WACC) can arrive at the firm value. As mentioned, the heavy assumption involved, especially when combined with mathematical formulae like the Gordon Growth to arrive at the "Terminal Value" renders the validity of the firm value as accurate as the underlying assumptions are. This model, despite the sophistication, is can be used for both public and closed firms.
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