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.

  1. Business Valuation

    Business valuation is the process of determining the economic ...
  2. Accounting Valuation

    Accounting valuation is the process of valuing a company's assets ...
  3. Book Value

    1. The value at which an asset is carried on a balance sheet. ...
  4. Historic Pricing

    A method for calculating the value of an asset using the last ...
  5. Liquidation Value

    The total worth of a company's physical assets when it goes out ...
  6. Fixed Asset

    A fixed asset is a long-term tangible piece of property that ...
Related Articles
  1. Investing

    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.
  2. Investing

    Market Value Versus Book Value

    Understanding the difference between book value and market value is a simple yet fundamentally critical component to analyze a company for investment.
  3. Managing Wealth

    How to Calculate Your Tangible Net Worth

    You can calculate your tangible net worth with a simple equation.
  4. Investing

    Book Value: How Reliable Is It For Investors?

    In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
  5. Investing

    Intangible Assets Provide Real Value To Stocks

    Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value.
  6. Small Business

    Public Vs. Private Tech Valuations: What's Driving the Divide?

    The gross valuations over the past five years are more indicative of the market than the true value of the company itself.
  7. Investing

    Analyzing the Price-to-Cash-Flow Ratio

    Find out how analyzing the price-to-cash-flow ratio can help you make batter investment decisions.
  8. Investing

    Discounted Cash Flow (DCF)

    Discover how investors can use this valuation method to determine the intrinsic value of a stock.
  1. What can cause an asset to trade above its market value?

    Learn some of the factors that can affect the price of an investment asset and the major reasons why an asset might trade ... Read Answer >>
  2. What is the difference between economic value and market value?

    Learn about the differences between economic value and market value. Discover how they serve different purposes for businesses ... Read Answer >>
  3. What is the difference between carrying value and market value?

    Understand the difference between carrying value and market value. Learn when a company uses carrying value to value an asset ... Read Answer >>
  4. What's the difference between book and market value?

    Book value is the price paid for a particular asset. On the other hand, market value is the current price at which you can ... Read Answer >>
  5. What is the difference between carrying value and fair value?

    Learn about the carrying value and fair value of assets and liabilities, what the carrying and fair value measure and the ... Read Answer >>
Hot Definitions
  1. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  5. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center