Harshal Jamdhade Swipe

What is
Valuation?
Everything you need to know!
 Harshal Jamdhade

Valuation

Valuation is the process of determining the true

value or worth of an asset, a company or an
investment opportunity.

It is an analytical process that considers

different approaches and factors to arrive at a
fair and accurate price for an asset or a
company.
 Harshal Jamdhade

What is its importance?

1) It can help investors make informed

decisions about whether to buy, or sell an
investment. By understanding the value of an
asset, investors can assess its attractiveness
and potential for growth.

2) Businesses can use valuation to determine

the value of their company, which can be
helpful for raising capital or making strategic
decisions.
 Harshal Jamdhade

Accurate valuation reports can improve a

business's credibility with investors, lenders,
and other stakeholders. This also contributes
to the long-term health and growth of a
business.

In the context of mergers and acquisitions,

valuation helps in determining a fair purchase
price, ensuring both parties get a reasonable
deal.
 Harshal Jamdhade

Types of Valuation Methods

Relative Discounted Asset-Based

Valuation Cash-Flow Valuation
Valuation
 Harshal Jamdhade

1) Discounted Cash-Flow Valuation

Discounted cash flow valuation (DCF) is the

widely used method in finance to determine the
value of a stock, a business, or any other asset
based on its future cash flows.

The core idea behind DCF is that the value of

an asset today is the sum of the present value
of all its future cash flow discounted at an
appropriate discount rate.

The discount rate is a measure of the riskiness

of the investment, and it reflects the time value
of money.
 Harshal Jamdhade

The discounted valuation formula is:

Future Cash Flow

Present Value =
(1 + Discount Rate)^n

where:
Present Value is the value of the asset or
investment today.
Future Cash Flow is the expected cash flow
in the future.
Discount Rate is the risk-adjusted discount
rate.
n is the number of years in the future
 Harshal Jamdhade

Discounted valuation is a powerful tool for

valuing assets and investments.

It is a relatively simple method to understand,

but it can be very accurate if the assumptions
are correct.

However, it is important to note that

discounted valuation is not perfect. The future
cash flows of an asset or investment are
uncertain, and the discount rate is a subjective
measure of risk.
 Harshal Jamdhade

2) Relative Valuation
Relative valuation, also known as comparable
valuation or market-based valuation, is a
method used to estimate the value of an asset
by comparing it to the value of similar assets in
the market.

The key concept behind relative valuation is

that assets with similar characteristics and risk
profiles should have similar values

This method is often used when the future cash

flows of an asset or investment are uncertain,
or when the asset or investment is difficult to
value using other methods.
 Harshal Jamdhade

The most common way to perform relative

valuation is to use a price-to-earnings (P/E) ratio.

Share Price
P/E =
Earnings per share (EPS)

By comparing the P/E ratio of a company to

the P/E ratios of similar companies, investors
can get a sense of whether the company is
undervalued or overvalued.
 Harshal Jamdhade

Other common multiples used in relative

valuation include:

Price-to-book (P/B) ratio: The ratio of a

company's stock price to its book value
per share

Price-to-sales (P/S) ratio: The ratio of a

company's stock price to its sales per
share.

Price-to-cashflow (P/CF) ratio: The ratio

of a company's stock price to its cash flow
per share.
 Harshal Jamdhade

3) Asset-Based Valuation

Asset-based valuation is a method of valuing an

asset or investment by estimating the fair
market value of its underlying assets.

This method is often used when the future cash

flows of an asset or investment are uncertain,
or when the asset is difficult to value using
other methods.

This approach focuses on the balance sheet

items and is often used for companies with a
significant portion of their value tied to tangible
assets, such as real estate, machinery, or
inventory.
 Harshal Jamdhade

The asset-based valuation process involves

identifying and valuing all of the assets of the
company or asset being valued.

This includes both tangible assets, such as

land, buildings, and equipment, and intangible
assets, such as patents and goodwill.

Once the fair market value of all of the assets

has been determined, the liabilities of the
company are subtracted to arrive at the net
asset value.

The net asset value calculated is considered to

be the value of the company or asset, based on
its underlying assets.
 Harshal Jamdhade

Asset-based valuation is a useful tool for

investors, but it is important to remember that
it is not perfect.

The value of an asset or investment can vary

depending on a number of factors, including
the company's financial performance, its
growth potential, and its competitive
landscape.

Therefore, it is important to use asset-based

valuation in conjunction with other valuation
methods to get a more accurate assessment of
value.
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