What is an 'Asset Valuation'
Asset valuation is the process of assessing the value of a company, real property or any other item of worth, in particular assets that produce cash flows. Asset valuation is commonly performed prior to the purchase or sale of an asset or prior to purchasing insurance for an asset. Asset valuation can be based on cash flows, comparable valuation metrics or transaction value.
BREAKING DOWN 'Asset Valuation'A large portion of financial theory is centered around asset valuation. Assets can include stocks, bonds, buildings, equipment and intangible assets such as brands, goodwill and labor. As a result, asset valuation often consists of both subjective and objective measurements. For example, there is no number on the financial statements that tells investors how much the company's brand is worth; brand is an intangible asset and the valuation is subjective. On the other hand, net profit is an objective measurement based on the company's income and expense figures. If a company is looking to acquire another company's assets, it can look at the book value of assets, the market value of assets, and the transaction or replacement value.
Asset Valuation Methods
When valuing a company, analysts look at the book value of assets and the market value of assets. The book value is generally lower than market value because assets are listed at their historical cost. Common methods for determining an asset's value include comparing it to similar assets and evaluating its cash flow potential. Acquisition cost, replacement cost and accumulated depreciation value are also methods of asset valuation.
One of the most common ways to value assets is based on future cash flows. For example, the value of stock is based on future cash flows from dividends and share price appreciation. The value of bonds is based on the future cash flows of interest payments. The value of commercial real estate is based, in part, on rent. This method only works for assets that produce cash flows. If assets do not produce cash flows, the analyst can conduct a transaction analysis.
Relative and Transaction Asset Valuation
The most liquid assets can be traded on the market and therefore have a market value. Assets that have a market value are valued based on multiples of that value. For instance, stocks are often valued based on a multiple of price to earnings, price-to-book value or price-to-cash flows. These are relative market valuations. Transaction or replacement cost analysis seeks to find deals involving similar assets. This method is good for illiquid assets or assets with no market value. For example, home values go through cycles of demand. The best way to determine a value for your home is to compare it against similar home sales in the same area.