Valuation Definition – “An estimate of a company’s value for the purposes of purchases, sale or investment”.
In simple words, it refers to the process of estimating the current worth of a company or an asset. This is basically done in case of purchase, sale or investment. And for the valuation researchers and analyst deeply study the capital structure, management and intrinsic value of the share of the company.
While valuating a company, firstly the sector in which it is working is identified. Then one should study the future prospects of that sector. Then compare the share price trends of the past five years of that company. In addition to this, also study the share trends of other big organization in the same industry.
Compare the Financial Ratios of 5 companies belonging to the same industry and draw out the conclusions. Once can calculate the financial ratios with the help of Balance Sheet and the Income statement. In addition to this, don’t forget to look over the organization’s consumption trends, competitive position and performance trends.
Procedure of Valuation of asset
- First of all, calculate the share’s intrinsic value. One can calculate this value using various models such as Dividend model, price earning model or weightage model.
- These models provide the intrinsic value of the stock.
- Compare this value with the market price of the share.
- If the intrinsic value is > market value, means the share is under priced. On the other hand, less intrinsic value indicates that the share is over priced. So go for under priced shares.
Importance of Valuation – Why Valuation is Used?
Without the importance of Valuation, valuation definition is incomplete. Valuation is very helpful for the investors to know the actual worth of the asset. Without valuation, they could invest in over priced asset which could result in loss to them in the future. It provides the true and clear picture of the financial position of the organization. But it is also very important that the organization should present its financial statements without any fraud. Plus the investor should also possess the required knowledge of doing the valuation.