Absolute Value

What is an 'Absolute Value'

An absolute value is a business valuation method that uses discounted cash flow analysis to determine a company's financial worth. The absolute value method differs from the relative value models that examine what a company is worth compared to its competitors. Absolute value models try to determine a company's intrinsic worth based on its projected cash flows.

BREAKING DOWN 'Absolute Value'

In addition to looking at ratios such as price to earnings and price to book value, value investors like to calculate what an entire business is worth when they are considering whether to buy a particular stock. Discounted cash flow models are one way to determine this worth. They estimate a company's future free cash flows, then discount that value to the present to determine an absolute value for the company. By comparing what a company's share price should be given its absolute value to the price the stock is actually trading it, investors can determine if a stock is currently under or overvalued.

RELATED TERMS
  1. Relative Valuation Model

    A business valuation method that compares a firm's value to that ...
  2. Relative Value

    A method of determining an asset's value that takes into account ...
  3. Present Value - PV

    The current worth of a future sum of money or stream of cash ...
  4. Abnormal Earnings Valuation Model

    A method for determining a company's worth that is based on book ...
  5. Large-Value Stock

    A type of large-cap stock investment where the intrinsic value ...
  6. Discounting

    The process of determining the present value of a payment or ...
Related Articles
  1. Investing Basics

    How To Choose The Best Stock Valuation Method

    There is no single valuation tactic that works in every situation. But a company’s characteristics provide clues to investors about the best method to use.
  2. Options & Futures

    Stock-Picking Strategies: Fundamental Analysis

    Ever hear someone say that a company has "strong fundamentals"? The phrase is so overused that it's become somewhat of a cliché. Any analyst can refer to a company's fundamentals without ...
  3. Professionals

    Common Stock Valuation

    No one valuation method is perfect for every situation, but by knowing the characteristics of the company, you can select the valuation method that best suits the situation
  4. Markets

    Fundamental Analysis: A Brief Introduction To Valuation

    By Ben McClureWhile the concept behind discounted cash flow analysis is simple, its practical application can be a different matter. The premise of the discounted cash flow method is that the ...
  5. Investing Basics

    What Is The Intrinsic Value Of A Stock?

    Intrinsic value reduces the subjective perception of a stock's value by analyzing its fundamentals.
  6. Investing Basics

    What Is The Intrinsic Value Of A Stock?

    Intrinsic value can be subjective and difficult to estimate. It’s a perception of a security’s value that factors tangible and intangible factors.
  7. Options & Futures

    Understanding Net Present Value

    Learn how this value is used to determine the worth of a project.
  8. Investing

    Discounted Cash Flow (DCF)

    Discover how investors can use this valuation method to determine the intrinsic value of a stock.
  9. Options & Futures

    Stock-Picking Strategies: Value Investing

    Value investing is one of the best known stock-picking methods. In the 1930s, Benjamin Graham and David Dodd, finance professors at Columbia University, laid out what many consider to be the ...
  10. Fundamental Analysis

    DCF Analysis: Introduction

    By Ben McClure Contact Ben It can be hard to understand how stock analysts come up with "fair value" for companies, or why their target price estimates vary so wildly. The answer often lies ...
RELATED FAQS
  1. How is perpetuity used in determining the intrinsic value of a stock?

    Learn about the basics of a perpetuity, its valuation, how it is calculated and how it is used when evaluating the intrinsic ... Read Answer >>
  2. When and why should the terminal value be discounted?

    Find out why investors use the terminal value, why the terminal value is discounted to the present day, and how it's related ... Read Answer >>
  3. Do you always have to consider intrinsic value when purchasing a stock? Why or why ...

    Take a deeper look at why value investors consider a stock's intrinsic value an important consideration before picking a ... Read Answer >>
  4. What is the difference between intrinsic value and current market value?

    Discover the differences between intrinsic and market values, what makes the former difficult to determine and how investor ... Read Answer >>
  5. Why is the time value of money (TVM) an important concept to investors?

    Understand why the time value of money is an important concept for investors. Learn when present value and future value calculations ... Read Answer >>
  6. Why would you take DCF into account rather than simply projecting future revenues?

    Learn what discounted cash flow analysis is and why it is considered a better equity valuation tool than simply projecting ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center