Absolute Value

AAA

DEFINITION of 'Absolute Value'

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.

INVESTOPEDIA EXPLAINS '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. Perceived Value

    The worth that a product or service has in the mind of the consumer. ...
  2. Discounted After-Tax Cash Flow

    An approach to valuing an investment that looks at the amount ...
  3. Extrinsic Value

    The difference between an option's market price and its intrinsic ...
  4. Operating Cash Flow - OCF

    In accounting, a measure of the amount of cash generated by a ...
  5. Discounted Cash Flow - DCF

    A valuation method used to estimate the attractiveness of an ...
  6. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
RELATED FAQS
  1. What is the Vortex Indicator (VI) formula and how is it calculated?

    The vortex indicator (VI) utilizes two different oscillators (+VI and -VI) that capture upward and downward movement in price ... Read Full Answer >>
  2. How is the Accumulative Swing Index calculated?

    The accumulative swing index was created and defined by J. Welles Wilder in "New Concepts in Technical Trading Systems" published ... Read Full Answer >>
  3. How are C-suite officers measured on performance?

    Evaluation of C-suite officers, especially the chief executive officer (CEO), is an important element of fundamental analysis. ... Read Full Answer >>
  4. How do I perform a financial analysis using Excel?

    Investors can use Excel to run technical calculations or produce fundamental accounting ratios. Corporations use Excel to ... Read Full Answer >>
  5. Is there an easy way to do financial forecasting in Excel?

    There is no easy way to conduct financial forecasting. All forecasting involves the technically impossible act of predicting ... Read Full Answer >>
  6. What can cause an asset to trade below its market value?

    An asset may trade below its market value due to a lack of demand for the asset in the marketplace, a perception or belief ... Read Full Answer >>
Related Articles
  1. Investing Basics

    DCF Valuation: The Stock Market Sanity Check

    Calculate whether the market is paying too much for a particular stock.
  2. Investing

    Using DCF In Biotech Valuation

    Valuing firms in this sector can seem like a black art, but there is a systematic way to pin a price on potential.
  3. Markets

    How To Choose The Best Stock Valuation Method

    Don't be overwhelmed by the many valuation techniques out there - knowing a few characteristics about a company will help you pick the best one.
  4. Fundamental Analysis

    Top 3 Pitfalls Of Discounted Cash Flow Analysis

    The DCF method can be difficult to apply to real-life valuations. Find out where it comes up short.
  5. Fundamental Analysis

    Taking Stock Of Discounted Cash Flow

    Learn how and why investors are using cash flow-based analysis to make judgments about company performance.
  6. Fundamental Analysis

    Invest in Cancer Research with These 3 Stocks

    These cancer research stocks offer both a high ceiling and the potential to save lives.
  7. Charts & Patterns

    Should Investors Get Into Oil Now?

    Oil has enjoyed a steady climb after a violent plunge. Where is it going next, and how can investors profit?
  8. Charts & Patterns

    How To Value Airline Stocks

    We explain what drives the stocks of airline companies and how best to assess their values.
  9. Markets

    Small-Cap Biotech Stocks to Watch

    Home runs in the small cap biotechnology market are hard to come by. Here are some names to watch.
  10. Fundamental Analysis

    Key Financial Ratios for Pharma Stock Investing

    Analysts simplify the business of investing in pharma by studying key financial ratios and metrics. Know these metrics before you buy or sell pharma.

You May Also Like

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. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center