What is a 'Valuation'
Valuation is the process of determining the current worth of an asset or a company; there are many techniques used to determine value. An analyst placing a value on a company looks at the company's management, the composition of its capital structure, the prospect of future earnings and market value of assets.
BREAKING DOWN 'Valuation'
The market value of a security is determined by what a buyer is willing to pay a seller, assuming both parties enter the transaction willingly. When a security trades on an exchange, buyers and sellers determine the market value of a stock or bond. The concept of intrinsic value, however, refers to the perceived value of a security based on future earnings or some other company attribute unrelated to the market price of a security.
How Earnings Impact Valuation
The earnings per share (EPS) formula is stated as earnings available to common shareholders divided by number of common stock shares outstanding. EPS is an indicator of company profit because the more earnings a company can generate per share, the more valuable each share is to investors. Analysts also use the pricetoearnings (P/E) ratio for stock valuation, which is calculated as market price per share divided by EPS. The P/E ratio calculates how expensive a stock price is relative to the earnings produced per share. For example, if the P/E ratio of a stock is 20 times earnings, an analyst compares that P/E ratio to other companies in the same industry and to the ratio for the broader market.
Factoring in Stock Options
Intrinsic value is also used to assess stock options. Assume an investor buys a $50, or strike price, call option on XYZ common stock. The investor has the right to exercise the option and buy 100 shares of XYZ stock at $50 per share before the option expiration date. Intrinsic value is the difference between the current market price of the stock and the optionâ€™s strike price. If the current market value is $65 per share, the intrinsic value is $65  $50, or $15 per share.
Examples of Discounted Cash Flows
Analysts also place a value on an asset or investment using the cash inflows and outflows generated by the asset. These cash flows are discounted into a current value using a discount rate, which is an assumption about interest rates or a minimum rate of return assumed by the investor. If a company is buying a piece of machinery, the firm analyzes the cash outflow for the purchase and the additional cash inflows generated by the new asset. All of the cash flows are discounted to a present value, and the business determines the net present value (NPV). If the NPV is a positive number, the company should make the investment and buy the asset.

P/E 30 Ratio
The pricetoearnings (P/E) ratio is the valuation ratio of a ... 
Asset Value Per Share
The total value of a fund's investments divided by its number ... 
Relative Value
A method of determining an asset's value that takes into account ... 
LargeValue Stock
A type of largecap stock investment where the intrinsic value ... 
Intrinsic Value
Intrinsic value is the actual value of a company or an asset ... 
Rate Of Return
The gain or loss on an investment over a specified period, expressed ...

Trading
How to Identify Mispriced Stocks
Find out how to identify mispriced stocks. Learn about intrinsic and relative valuation methods based on fundamentals, and technical analysis. 
ETFs & Mutual Funds
Value Investing Strategies in a Volatile Market
Volatile markets are a scary time for uneducated investors, but value investors use volatile periods as an opportunity to buy stocks at a discount. 
Investing
What Is The Intrinsic Value Of A Stock?
Intrinsic value can be subjective and difficult to estimate. Itâ€™s a perception of a securityâ€™s value that factors tangible and intangible factors. 
Investing
How To Find P/E And PEG Ratios
If these numbers have you in the dark, these easy calculations should help light the way. 
Investing
What Is The Intrinsic Value Of A Stock?
Intrinsic value reduces the subjective perception of a stock's value by analyzing its fundamentals. 
Investing
Beware False Signals From The P/E Ratio
The P/E ratio is a simple tool for evaluating a company, but no one ratio can tell the whole story. 
Markets
Why Are Global Markets Freaking Out? A Markets Explainer
Stock markets around the world are off to their worst year ever, but understanding what stocks are will take the mystery out of their movements. 
Markets
How to Invest Your Excess Cash in Undervalued Securities
Learn how even small investors can shoot for substantial capital gains by starting to invest their excess cash in undervalued securities. 
Investing
4 Signs Your Value Stock May Be Overvalued
Value investing can make you money, but you have to look for traps. Overvalued stocks often correct, which means investors need to know when to get out. 
Investing
Comparing the P/E, EPS And Earnings Yield
Here are three ratios that help investors value stock returns.

When does a growth stock turn into a value opportunity?
Learn how fundamental analysts use valuation measures, such as the pricetoearnings ratio, to identify when a growth stock ... Read Answer >> 
What does the forward p/e indicate about a company?
Explore the forward price to earnings ratio and learn its significance and how it compares to the traditional price to earnings ... Read Answer >> 
What is the difference between a company's book value per share and its intrinsic ...
Book value and intrinsic value are two ways to measure the value of a company.In simple terms, book value is based on the ... Read Answer >> 
Is book value a better metric for company worth than the PE ratio?
Determine the best situations in which to utilize book value, P/E ratio and other metrics to determine the true worth of ... Read Answer >> 
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 >> 
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 >>