In finance, valuation is a process of determining the fair market value of an asset. Equity valuation therefore refers to the process of determining the fair market value of equity securities. The general belief is that the value of any asset or security is exactly equal to the discounted present value of all the cash flows that can be derived from it in future periods.
Equity Valuation
Detailed Analysis Support
Using this principle, one can easily value securities like debt. This is because they have a finite existence and predictable cash flows. However, equity valuation is not so simple. Equity brings rights that are unlimited in time and cash flows are uncertain and not easy to predict.
”The stock market is filled
Phillip Fisher
with individuals who
know the price of
everything, but the
value of nothing.
Method Overview
This method is composed of five steps analysis which shall provide insights on internal factors, external factors (industry and economy). Those insights shall provide the assumptions framework for company future performance forecast, and finally based on the outcome of this forecast one should be able to perform Equity Valuation and to provide conclusions.
Company Overview
The objective of this section is to provide insights on business model and company historical performance. It includes overview on general company information, balance sheet, income statement and financial analysis.
Market Overview
No company operates in vacuum. As such, the performance of every business is influenced by the performance of the industry in which it operates. Therefore, it is necessary to conduct a market assessment in order to gain better understanding on the company’s environment.
Economy Overview
When assessing the environment, it is required to take into account the overall economy and to understand the big picture as both industry and company performance are impacted by macro economic factors and trends, and those should be taken into account as well.
Forecast Company Performance
When internal and external factors are assessed, the real calculations may step in based on the assumptions previously derived. The goal of this phase is to provide the reasonable forecast on how the company will perform in the future, and those information will serve as inputs for final calculations in Equity Valuation phase.
Perform Equity Valuation
There are three main approaches to perform Equity Valuation: DCF method, Cost replacement method and Market method (comparable companies or transactions). Our methodology primarily counts on DCF method, Cost method is usually excluded from analysis and Market method shall be used only as a benchmark or illustrative purposes.