Valuation Analysis: Meaning, Examples, and Use Cases

What Is Valuation Analysis?

Valuation analysis estimates the value or worth of an asset, including businesses, equities, fixed income securities, commodities, real estate, and other assets. Different approaches may be used for different types of assets, but the focus remains on the underlying fundamentals of the asset.

Key Takeaways

• Valuation analysis estimates the fair or intrinsic value of an asset, such as a business or security.
• Valuation analysis uses various methodologies and models to determine a single price based on different inputs.
• The valuation process varies depending on the type of asset, its cash flows, and the purpose of the valuation.

Understanding Valuation Analysis

Valuation analysis involves both science (number crunching) and art, as assumptions must be made for model inputs. The value of an asset is the present value of its forecasted future cash flows. For example, valuing a company requires assumptions about sales growth, margins, financing choices, capital expenditures, tax rates, and discount rates for the present value formula.

Once the model is set up, the analyst can adjust variables to see how valuation changes with different assumptions. No single model fits all asset classes. A manufacturing company may use a multi-year DCF model, while a real estate company may rely on net operating income and capitalization rate. Commodities like iron ore, copper, or silver would be analyzed based on global supply and demand forecasts.

How Valuation Analysis is Used

Valuation analysis can be expressed as a single number or a range of numbers. For example, a company may have a valuation of $5 billion, or an asset’s value may depend on a variable and fluctuate between par and 90% of par. Valuation can also be expressed as a price multiple, such as price-to-earnings (P/E) ratio, enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), or price-to-book (P/B) ratio. Valuation analysis can also determine asset value or net asset value (NAV) per share.

Valuation and Intrinsic Value

Valuation analysis helps investors estimate intrinsic values of company shares for better-informed investment decisions. While fair values of bonds barely deviate from intrinsic values, opportunities may arise with heavily indebted companies facing financial stress. Valuation analysis is also useful for comparing companies within the same sector or estimating investment returns over time.