Valuation

  • Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.
  • A Valuation can be useful when trying to determine the fair value of a security, which is determined by what a buyer is willing to pay a seller, assuming both parties enter the transaction willingly. When a security trades on an exchange, buyers and sellers determine the market value of a stock or bond.
  • The concept of intrinsic value, however, refers to the perceived value of a security based on future earnings or some other company attribute unrelated to the market price of a security. That's where valuation comes into play. Analysts do a valuation to determine whether a company or asset is overvalued or undervalued by the market.
  • Valuation is a quantitative process of determining the fair value of an asset, investment, or firm.
  • In general, a company can be valued on its own on an absolute basis, or else on a relative basis compared to other similar companies or assets.
  • Valuations can be quickly impacted by corporate earnings or economic events that force analysts to retool their valuation models.
  • While quantitative in nature, valuation often involves some degree of subjective input or assumptions.
  • It gives better knowledge of company assets.
  • To Manage Tax Transactions Efficiently
  • Understand Where Your Business Fits In The Industry
  • Obtaining Finance From Banks
  • Access to More Investors
  • Better During Mergers/Acquisitions

Limitations of Valuation :

When deciding which valuation method to use to value a stock for the first time, it's easy to become overwhelmed by the number of valuation techniques available to investors. There are valuation methods that are fairly straightforward while others are more involved and complicated.

Unfortunately, there's no one method that's best suited for every situation. Each stock is different, and each industry or sector has unique characteristics that may require multiple valuation methods. At the same time, different valuation methods will produce different values for the same underlying asset or company which may lead analysts to employ the technique that provides the most favorable output.