Compounding Quality Pieter Slegers
What is
VALUATION?
Compounding Quality Pieter Slegers
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.
Compounding Quality Pieter Slegers
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.
Compounding Quality Pieter Slegers
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.
Compounding Quality Pieter Slegers
TYPES OF VALUATION METHODS
Discounted
Relative Asset-Based
Cash-Flow
Valuation Valuation
Valuation
Compounding Quality Pieter Slegers
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.
Compounding Quality Pieter Slegers
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.
Compounding Quality Pieter Slegers
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.
Compounding Quality Pieter Slegers
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.
Compounding Quality Pieter Slegers
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
Compounding Quality Pieter Slegers
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.
Compounding Quality Pieter Slegers
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.
Compounding Quality Pieter Slegers
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 a 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 value of the company or asset, based on its
underlying assets.
Asset-bases valuation is a useful tool for
investors, but it is important to remember that
it is not perfect.
Compounding Quality Pieter Slegers
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 ME
If you learned
something, please
spread the word by
liking or reposting this
piece
WWW.COMPOUNDINGQUALITY.NET
Pieter Slegers
Compounding Quality
