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Valuation Analysis

What is a 'Valuation Analysis'

A form of fundamental analysis that looks to compare the valuation of one security to another, to a group of securities or within its own historical context. Valuation analysis is done to evaluate the potential merits of an investment or to objectively assess the value of a business or asset.

Valuation analysis is one of the core duties of a fundamental investor, as valuations (along with cash flows) are typically the most important drivers of asset prices over the long term.

Explaining 'Valuation Analysis'

Valuation analysis should answer the simple, yet vital, question of, "What is something worth?" The analysis is then based on either current projections or projections of the future. While investors can agree on a metric like the current price-to-earnings ratio (P/E ratio), how to interpret a given valuation can and will differ among those same investors.

Many types of valuation methods are used, involving several sets of metrics. For equities, the most common valuation metric to use is the P/E ratio, although other valuation metrics include: Price/Earnings, Price/Book Value, Price/Sales, Enterprise Value/EBIDTA, Economic Value Added and Discounted Cash Flow.


Further Reading


Economic valuation of the environment
ideas.repec.org [PDF]
… PART 4 Further case studies 297 298 Case 1 Qantas Case 2 Airlines: Depreciation differences Case 3 Recasting financial statements Case 4 Cochlear: Provisions and patent disputes Case 5 Accounting analysis: Cash flow reconciliation Case 6 Valuation ratios in …

Corporate governance and market valuation in ChinaCorporate governance and market valuation in China
www.sciencedirect.com [PDF]
… PART 4 Further case studies 297 298 Case 1 Qantas Case 2 Airlines: Depreciation differences Case 3 Recasting financial statements Case 4 Cochlear: Provisions and patent disputes Case 5 Accounting analysis: Cash flow reconciliation Case 6 Valuation ratios in …

Risk and valuation of collateralized debt obligationsRisk and valuation of collateralized debt obligations
www.tandfonline.com [PDF]
… PART 4 Further case studies 297 298 Case 1 Qantas Case 2 Airlines: Depreciation differences Case 3 Recasting financial statements Case 4 Cochlear: Provisions and patent disputes Case 5 Accounting analysis: Cash flow reconciliation Case 6 Valuation ratios in …

Ratio analysis and equity valuation: From research to practiceRatio analysis and equity valuation: From research to practice
link.springer.com [PDF]
… PART 4 Further case studies 297 298 Case 1 Qantas Case 2 Airlines: Depreciation differences Case 3 Recasting financial statements Case 4 Cochlear: Provisions and patent disputes Case 5 Accounting analysis: Cash flow reconciliation Case 6 Valuation ratios in …



Q&A About Valuation Analysis


What is Valuation Analysis?

Valuation analysis is a form of fundamental analysis that looks to compare the valuation of one security to another, to a group of securities or within its own historical context.

What are some metrics used in valuation analysis?

The most common metric used in valuation analysis is PE ratio, although other metrics include PriceEarnings, PriceBook Value, PriceSales, Enterprise ValueEBIDTA, Economic Value Added and Discounted Cash Flow.

What are some different types of methods used for valuations?

There are many types including; Historical Method (comparison with past), Market Data Method (comparison with peers), Asset-Based Approach (comparison with assets), Income-Based Approach (comparison with income) and Relative Approach (comparing against similar companies).

What does Valuation Analysis answer?

It answers the question "What is something worth

How do you do valuation analysis?

You either project future cash flows or use current projections.

Who uses valuation analysis?

Fundamental investors use it.

Why should you consider both intrinsic value and price when making an investment decision?

Because they can be very different things. Intrinsic value represents what an asset is actually worth while price represents what someone else will pay for it at any given time.

Which method should you use when valuing stocks?

This depends on your investment style but generally speaking the market data approach would be best suited for value investors while the relative approach would be better suited for growth investors.

When using discounted cash flow models how do you calculate terminal value if there's no projected growth after that point in time?

You assume zero growth from then on out which means that any

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