What is a 'Valuation Analysis'

Valuation analysis is a process to estimate the approximate value or worth of an asset, whether a business, equity or fixed income security, commodity, real estate or other asset. The analyst may use different approaches to valuation analysis for different types of assets, but the common thread will be looking at the underlying fundamentals of the asset.

BREAKING DOWN 'Valuation Analysis'

Valuation analysis is mostly science (number crunching), but there is also a bit of art involved because the analyst is forced to make assumptions for model inputs. The value of an asset is basically the present value (PV) of all future cash flows that the asset is forecasted to produce. Inherent in the estimation model for a company, for example, is a myriad of assumptions regarding sales growth, margins, financing choices, capital expenditures, tax rates, discount rate for the PV formula, etc. Once the model is set up, the analyst can play with the variables to see how valuation changes with these different assumptions. There is no one-size-fits-all model for assorted asset classes. Whereas a valuation for a manufacturing company may be amenable to a multi-year DCF model, and a real estate company would be best modeled with current net operating income (NOI) and capitalization rate (cap rate), commodities such as iron ore, copper or silver would be subject to a model centered around global supply and demand forecasts.

The output of valuation analysis can take many forms. It can be a single number, such as a company having a valuation of approximately $5 billion, or it could be a range of numbers if the value of an asset is largely dependent on a variable that often fluctuates, such as a corporate bond with a high duration having a valuation range between par and 90% of par depending on the yield on the 30-year Treasury bond. Valuation can be expressed as a price multiple. For example, as a tech stock is trading at a price-to-earnings (P/E) multiple of 40x, a telecom stock is valued at 6x enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) or a bank is trading at 1.3x price-to-book (P/B) ratio. Valuation analysis can also take the final form of as asset value per share or net asset value (NAV) per share.

Valuation analysis is important for investors to estimate intrinsic values of company shares in order to make better informed investment decisions. Fair values of bonds do not deviate much, if at all, from intrinsic values, but opportunities do arise once in a while in the case of financial stress of a heavily indebted company. Valuation analysis is a useful tool for comparing companies within the same sector or estimating a return on an investment over a given time period.

RELATED TERMS
  1. Accounting Valuation

    Accounting valuation is the process of valuing a company's assets ...
  2. Comparable Company Analysis - CCA

    A comparable company analysis (CCA) is a process used to evaluate ...
  3. Absolute Value

    Absolute value is a business valuation method that uses discounted ...
  4. Abnormal Earnings Valuation Model

    The abnormal earnings valuation model is a method for determining ...
  5. Multiples Approach

    The multiples approach is a valuation theory based on the idea ...
  6. Asset Valuation Review (AVR)

    Asset valuation review is a process that establishes an estimate ...
Related Articles
  1. Investing

    IPO Valuation: It Happens a Few Times

    There’s a big difference between fundamental valuation, supply & demand, and what’s written on the ‘first trade’ ticket.
  2. Investing

    Relative Valuation: How to Value Other Stocks

    This effective approach, relative valuation, will help you understand which stocks you should be investing in.
  3. Managing Wealth

    Asset Manager Ethics: Valuation Is A Tricky Business

    Asset managers must accurately represent all of a clients assets in the client portfolio. This can be tricky for unique and hard-to-value assets.
  4. Personal Finance

    Discounted cash flows or comparables: Which to use

    DCF and comparables models are widely used in equity valuation, and here we'll explain the pros and cons of each method.
  5. Investing

    Discounted Cash Flow (DCF)

    Discover how investors can use this valuation method to determine the intrinsic value of a stock.
  6. Investing

    Learn to Value Real Estate Investment Property

    Make sure you know what your real estate investment is worth before you sign the ownership papers. Learn what capitalization rate means to your net operating income.
  7. Small Business

    Is the Private Equity Bubble Still Expanding? (GS)

    Learn about the factors influencing valuations in the private equity market. Find out if there is a private tech bubble and if it is growing in 2016.
  8. Investing

    Equity Valuation In Good Times And Bad

    Learn how to filter out the noise of the market place in order to find a solid way of determing a company's value.
RELATED FAQS
  1. How is convertible bond valuation different than traditional bond valuation?

    Read about bond valuation, particularly the differences between how a traditional bond is valued and how a convertible bond ... Read Answer >>
  2. How is sensitivity analysis used?

    Sensitivity analysis is used to identify how much variations in the input values for a given variable will impact the results ... Read Answer >>
Trading Center