Valuation Analysis

Valuation Analysis

Valuation analysis is a process to estimate the approximate value or worth of an asset, whether its a business, equity, fixed income security, commodity, real estate, or other assets. It can be a single number, such as a company having a valuation of approximately $5 billion, or it could be a range of numbers if the value of an asset is largely dependent on a variable that often fluctuates, such as a corporate bond with a high duration having a valuation range between par and 90% of par depending on the yield on the 30-year Treasury bond. Whereas a valuation for a manufacturing company may be amenable to a multi-year DCF model, and a real estate company would be best modeled with current net operating income (NOI) and capitalization rate (cap rate), commodities such as iron ore, copper, or silver would be subject to a model centered around global supply and demand forecasts. Valuation analysis can also take the final form of as asset value per share or net asset value (NAV) per share. Valuation analysis is a process to estimate the approximate value or worth of an asset, whether its a business, equity, fixed income security, commodity, real estate, or other assets.

Valuation analysis seeks to estimate the fair value or intrinsic value of an asset, such as business or a security.

What Is Valuation Analysis?

Valuation analysis is a process to estimate the approximate value or worth of an asset, whether its a business, equity, fixed income security, commodity, real estate, or other assets. The analyst may use different approaches to valuation analysis for different types of assets, but the common thread will be looking at the underlying fundamentals of the asset.

Valuation analysis seeks to estimate the fair value or intrinsic value of an asset, such as business or a security.
Valuation analysis relies on several different methodologies and models in order to come up with a single price based on different inputs or variables.
Different valuation processes will be employed depending on the type of asset being considered, whether that asset produces cash flows, and what the purpose of the valuation is for.

Understanding Valuation Analysis

Valuation analysis is mostly science (number crunching), but there is also a bit of art involved because the analyst is forced to make assumptions for model inputs. The value of an asset is basically the present value (PV) of all future cash flows that the asset is forecasted to produce. Inherent in the estimation model for a company, for example, is a myriad of assumptions regarding sales growth, margins, financing choices, capital expenditures, tax rates, discount rate for the PV formula, etc.

Once the model is set up, the analyst can play with the variables to see how valuation changes with these different assumptions. There is no one-size-fits-all model for assorted asset classes. Whereas a valuation for a manufacturing company may be amenable to a multi-year DCF model, and a real estate company would be best modeled with current net operating income (NOI) and capitalization rate (cap rate), commodities such as iron ore, copper, or silver would be subject to a model centered around global supply and demand forecasts.

How Valuation Analysis is Used

The output of valuation analysis can take many forms. It can be a single number, such as a company having a valuation of approximately $5 billion, or it could be a range of numbers if the value of an asset is largely dependent on a variable that often fluctuates, such as a corporate bond with a high duration having a valuation range between par and 90% of par depending on the yield on the 30-year Treasury bond. Valuation can be expressed as a price multiple. For example, as a tech stock is trading at a price-to-earnings (P/E) multiple of 40x, a telecom stock is valued at 6x enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) or a bank is trading at 1.3x price-to-book (P/B) ratio. Valuation analysis can also take the final form of as asset value per share or net asset value (NAV) per share.

Valuation and Intrinsic Value

Valuation analysis is important for investors to estimate intrinsic values of company shares in order to make better-informed investment decisions. Fair values of bonds do not deviate much, if at all, from intrinsic values, but opportunities do arise once in a while in the case of financial stress of a heavily indebted company. Valuation analysis is a useful tool for comparing companies within the same sector or estimating a return on an investment over a given time period.

Related terms:

30-Year Treasury

The 30-Year Treasury, formerly the bellwether U.S. bond, is a U.S. Treasury debt obligation that has a maturity of 30 years. read more

Absolute Value

Absolute value is a measure of a company's or asset's intrinsic value. read more

Balance Sheet : Formula & Examples

A balance sheet is a financial statement that reports a company's assets, liabilities and shareholder equity at a specific point in time. read more

Bottom-Up Investing

Bottom-up investing is an investment approach that focuses on the analysis of individual stocks and de-emphasizes the significance of macroeconomic cycles. read more

Business Valuation , Methods, & Examples

Business valuation is the process of estimating the value of a business or company. read more

Capitalization Rate

The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate.  read more

Cash Flow Statement & Examples

A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows and outflows a company receives.  read more

Discounted Cash Flow (DCF)

Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. read more

What is EBITDA - Formula, Calculation, and Use Cases

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company's overall financial performance. read more

Enterprise Value (EV) , Formula, & Examples

Enterprise value (EV) is a measure of a company's total value, often used as a comprehensive alternative to equity market capitalization that includes debt. read more

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