Valuation is the estimation of an asset value, based either:
- On variables related to future investment returns Or
- On comparison with similar assets
The tools of equity valuation can be applied to solve several purposes:
- Selecting Stocks: Is this a security that I shall sell, purchase or continue to own? Is it fairly valued, overvalued or undervalued?
- Evaluating private businesses
- Assessing the impact of Corporate Events (mergers, acquisition, buy-outs): As these will impact the company’s future cash flow.
- Evaluating the impact of business strategies and models
The Valuation Process
- Understanding the Business
- Selecting the Appropriate Valuation Model
- Forecasting Company Performance
- Converting Forecasts to Valuation
- Making the Investment Decision (recommendation)