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?
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.
Businesses can use valuation to
determine the value of their company,
which can help raise capital or make
strategic decisions.
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.
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
1 2 3
Discounted
Relative Cash-Flow Asset-Based
Valuation Valuation Valuation
01 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.
02 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.
03 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.
