What is Valuation?
Valuation is an important part of finance, necessary for good decision-making. It is the process of determining the worth of a company’s share price under certain assumptions. There are many different types of valuation measurements that are used by investors, analysts, and other stakeholders in the corporate world. Financial valuation is the process of comparing one asset to another based on its potential value in the future. Valuation can be applied to companies or individuals.
What Types of Value do Fintalent’s Consultants Measure?
Our freelance financial consultants often identify the following types of value when carrying out valuation exercises:
i) Intrinsic value. Intrinsic values are an asset’s fundamental characteristics that give it its current worth. This includes the subjective aspects of a company’s business strategy, its intellectual property (IP), or any other tangible assets. Intrinsic values can be thought of as defining factors in what an asset is worth. For example, a company’s management team may have found an innovative method to make money in order to acquire more resources for the company.
ii) Market Value. Market value is the price at which an asset can be bought or sold in the open market. The price that people are willing to pay for an asset is called its value. For example, if you own shares in Apple Inc., you can sell your shares in the open market at its current market value.
iii) Cash-flow Value. Cash-flow value is the difference between the present worth of future revenues and present worth of future expenditures. The difference can be calculated by taking net income (or net cash inflow) and subtracting capital expenditures (or capital outflows).
How Fintalent Consultants Calculate Intrinsic Value
Intrinsic value can be calculated through discounted cash flow valuation or market capitalization. Fintalent Consultants apply 4 steps in calculating the intrinsic value of an asset.
Firstly, the total discounted future cash flows must be calculated followed by the discount rate. Next, the present net asset value of the company is subtracted from the current cost of that asset which can then be compared to its market price, if it is being sold, or its expected cash flow over time, if it is being held long-term.
Difference between DCF and Market Capitalization
The key difference between DCF and market cap is that DCF values take into account intangible assets such as goodwill, patents, trademarks, franchise rights; meanwhile, market capitalization (such as share price) does not. Market capitalization only takes into account tangible assets such as land and buildings.
Difference between market cap and intrinsic value
The two terms have a similar meaning, but fundamental differences arise from the way that each is calculated. Market capitalization is calculated by taking a company’s current stock price and multiplying it by the amount of shares outstanding. In this calculation, an asset’s value can be inflated or deflated due to management strategies, such as stock buybacks or dividends. Intrinsic value, on the other hand, calculates a company’s assets from a more long-term perspective. This includes intangible assets such as trademarks and things that can’t be seen or touched (i.e., brand equity).
Methods of Asset Valuation in Corporate Finance
Liquidation valuation is used to determine the amount of money that can be raised by selling off a company’s assets. This method only works if the company has no outstanding liabilities; otherwise, part of the proceeds must be set aside to satisfy any debts. This method is not very widely used because it is hard to identify which assets should be sold off for cash. There are also tax issues involved in liquidation (e.g., capital gains tax).
Income or earnings valuation is used to calculate the present value of a firm’s income. This method assumes that a company’s future earnings will remain constant, and therefore it does not consider the risk of the business. It is very popular because it does not require market or investment analysis, and can be performed on most companies independent of past performance. However, any rise in capital requirements decreases a firm’s ability to make a profit.
Market-based valuation methods look to other companies for comparable firms with similar attributes (such as earnings records) and compare their share prices with those of the company under consideration. This method works best for firms which are publicly traded. It does not require market or investment analysis, and is very simple to apply. However, it is also easy to misinterpret the future value of a company if no other companies are traded in the same market.
Fintalent Consultants Can Help With Proper Valuation
Valuation of a business’ asset or liabilities is a critical step towards determining the value of that company whether to undertake a merger, acquire a facility or to determine the financial standing of a business. this step is therefore best done by professionals who understand how to carry out the process and what to look out for. Fintalent provides a rich pool of Valuation experts that can achieve your business’ Capital or Debt Structuring needs in order to achieve the desired Business Turnaround objectives.