Valuation Analysis

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS'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.

RELATED TERMS
  1. Ratio Analysis

    Quantitative analysis of information contained in a company’s ...
  2. Earnings Power Value - EPV

    A technique for valuing stocks by making an assumption about ...
  3. Abnormal Earnings Valuation Model

    A method for determining a company's worth that is based on book ...
  4. Discounted Payback Period

    A capital budgeting procedure used to determine the profitability ...
  5. Economic Value Added - EVA

    A measure of a company's financial performance based on the residual ...
  6. Valuation

    The process of determining the current worth of an asset or company. ...
Related Articles
  1. Markets

    Relative Valuation Of Stocks Can Be A Trap

    This method of valuing a company can make it look like a bargain when it is not.
  2. Investing Basics

    What Is The Impact Of Research On Stock Prices?

    The answer to this question is directly related to the importance of information in the marketplace.
  3. Investing Basics

    How To Make A Winning Long-Term Stock Pick

    Discover the key elements of a good long-term investment and how to find them.
  4. Bonds & Fixed Income

    8 Reasons M&A Deals Fall Through

    Mergers and acquisitions can mean big success. But what about all the deals that fall through?
  5. Markets

    Investment Valuation Ratios

    Learn about per share data, price/book value ratio, price/cash flow ratio, price/earnings ratio, price/sales ratio, dividend yield and the enterprise multiple.
  6. Fundamental Analysis

    4 Utility Stocks that May Stay Bright

    With interest rates likely rising in the next year or so, there are a few utility stocks with potential to outperform their peers.
  7. Professionals

    Are Stock Buybacks Always Good for Shareholders?

    Stock buyback programs aren't always done with the interests of shareholders in mind. It's important to try to understand the motivation behind such moves.
  8. Fundamental Analysis

    Making Sense of Netflix's Balance Sheet

    Understand how to assess Netflix's performance based on the major components of its balance sheet.
  9. Fundamental Analysis

    Explaining Price Targets

    A price target is what an investment analyst projects a security’s future price to be.
  10. Economics

    What's a Centrally Planned Economy?

    A centrally planned economy is one where the government controls the country’s supply and demand of goods and services.
RELATED FAQS
  1. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  2. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  3. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  4. How can a company execute a tax-free spin-off?

    The two commonly used methods for doing a tax-free spinoff are either to distribute shares of the spinoff company to existing ... Read Full Answer >>
  5. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
  6. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Nanny Tax

    A federal tax that must be paid by people who hire household help (a babysitter, maid, gardener, etc.) and pay them a total ...
  2. Dog And Pony Show

    A colloquial term that generally refers to a presentation or seminar to market new products or services to potential buyers.
  3. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  4. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  5. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  6. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!