Scribd
Upload
84 views15 pages

What Is Valuation - The Valuation School

Uploaded by

getmedude
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
84 views15 pages

What Is Valuation - The Valuation School

Uploaded by

getmedude
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 15

What is

VALUATION?
Valuation
Valuation is the process of determining the true
value of an asset, a company or an investment
opportunity.

It is an analytical process that considers different


approaches and factors to arrive at a fair and
accurate price for an asset or a company.
Importance of Valuation?
1) It can help investors make informed decisions
about whether to buy, or sell an investment. By
understanding the value of an asset, investors can
assess its attractiveness and potential for growth.

2) Businesses can use valuation to determine the


value of their company, which can help raise
capital or make strategic decisions.
3) Accurate valuation reports can improve a
business's credibility with investors, lenders, and
other stakeholders. This also contributes to the
long-term health and growth of a business.

4) In the context of mergers and acquisitions,


valuation helps in determining a fair purchase
price, ensuring both parties get a reasonable deal.
TYPES OF VALUATION METHODS

Relative Discounted
Asset-Based
Valuation Cash-Flow
Valuation
Valuation
1) Discounted Cash-
Flow Valuation
Discounted cash flow valuation (DCF) is the widely
used method in finance to determine the value of
a stock, a business, or any other asset based on
its future cash flows.

The core idea behind DCF is that the value of an


asset today is the sum of the present value of all
its future cash flow discounted at an appropriate
discount rate.

The discount rate is a measure of the riskiness of


the investment, and it reflects the time value of
money.
The discounted valuation formula is:

Future Cash Flows


Present Value =
(1 + Discount Rate)^n

Where:

Present Value is the value of the asset or


investment today.
Future Cash Flow is the expected cash flow in
the future.
Discount Rate is the risk-adjusted discount rate.
n is the number of years in the future.
Discounted valuation is a powerful method of
valuing assets and investments.

It is a relatively simple method to understand, but it can


be very accurate if the assumptions are correct.

However, it is important to note that discounted


valuation is not perfect. The future cash flows of an
asset or investment are uncertain, and the discount rate
is a subjective measure of risk.
2) Relative Valuation
Relative valuation, also known as comparable
valuation or market-based valuation, is a method
used to estimate the value of an asset by comparing
it to the value of similar assets in the market.

The key concept behind relative valuation is that


assets with similar characteristics and risk profiles
should have similar values.

This method is often used when the future cash flows


of an asset or investment are uncertain, or when the
asset or investment is difficult to value using other
methods.
The most common way to perform relative valuation is to
use a Price-to-Earnings (P/E) ratio.

Share Price
P/E =
Earnings per share (EPS)

By comparing the P/E ratio of a company to the P/E


ratios of similar companies, investors can get a sense
of whether the company is undervalued or overvalued.
Other common multiples used in relative
valuation include:

Price-to-book (P/B) ratio: The ratio of a


company's stock price to its book value per share.

Price-to-sales (P/S) ratio: The ratio of a


company's stock price to its sales per share.

Price-to-cashflow (P/CF) ratio: The ratio of a


company's stock price to its cash flow per share.
3) Asset-Based Valuation
Asset-based valuation is a method of valuing an
asset or investment by estimating the fair market
value of its underlying assets.

This method is often used when the future cash flows


of an asset or investment are uncertain, or when the
asset is difficult to value using other methods.

This approach focuses on the balance sheet items


and is often used for companies with a significant
portion of their value tied to tangible assets, such as
real estate, machinery, or inventory.
The asset-based valuation process involves
identifying and valuing all of the assets of the
company or asset being valued.

This includes both tangible assets, such as land,


buildings, and equipment, and intangible assets,
such as patents and goodwill.

Once the fair market value of all of the assets


has been determined, the liabilities of the
company are subtracted to arrive at the net asset
value.

The net asset value calculated is considered to


be the value of the company or asset, based on
its underlying assets.
Asset-based valuation is a useful tool for
investors, but it is important to remember that it is
not perfect.

The value of an asset or investment can vary


depending on several factors, including the
company's financial performance, its growth
potential, and its competitive landscape.

Therefore, it is important to use asset-based


valuation in addition to other valuation methods to
get a more accurate assessment of value.
Follow Us For
Premium Finance
Content

Research Credits
Harshal Jamdhade

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy