What is Valuation?

What is financial modelling

 

Definition: It is the process to determine the Current worth of any asset, product or company. In our case we are going to understand the valuations of companies.

The valuation of companies can be done following two different fundamental concepts:

  1. Liquidation value
  2. A going concern value
Most of the analysis in investment banks, private equitiesor other research houses, the valuation of company is done on a going concern basis where as liquidation valuation is used very occasionally. Liquation valuation is done when we are considering a distressed companies.

So most of the time, you will also do the valuation of company which is a going concern. A going concern means that the company will operate in the foreseeable future or perpetually.

In Research companies, Investment Banks and Private Equity, they perform valuations with many techniques but most important technique are given below.
  1. Discounted Cash Flow valuation
  2. Relative Valuation
  3. Transaction Valuation
  4. Sum of Total Parts Valuations
  5. Leverage Bought Valuation
Out of the 5 techniques given above, initial three techniques are most commonly used. Performing valuations with DCF, RV & TV is the everyday task of an analyst in the Research house or Investment Bank.

When you do the valuation of company, you don’t depend only one technique of valuation rather you use a combination multiple techniques which will give you range of valuation. Then those values are placed on a chart and that chart is called football field.

From the football fired we interpret the common value given by different valuation techniques is assumed to be the real value of company.



Best of luck.

Manoj Kumar

Senior Faculty

Investment Banking Institute

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