A Brief Primer On Equity Valuation – Models, Processes & Best Practices

Have you ever invested in a company or thought about investing in one? Well, if you have, the term equity valuation should not be new to you. Chances are that you have come across it or even know what it means and how to go about it.

You can use different types to estimate the value of a company, making it quite challenging for you to understand all of them. It can also get tricky to understand which method to use at any particular time.

However, you do not have to worry about this anymore. This article will give you tips on everything you need to know about equity valuation.

Equity Valuation, Tools, and Resources

Before investing in a company, it makes sense to find out or estimate the value of the company. There are many ways to do that, as well as models, tools, and processes. The entire process is referred to as equity valuation.

You will look at different factors depending on the method of valuation that you use when estimating the value of a company. If you want to get the most accurate valuation, make sure that you have used different methods of valuation. You also need to use the right tools and resources.

For instance, if you want to unveil the true value of stocks, you might need to look at Alpha Spread, a platform used for stock valuation. This platform employs not only proven but also science-based methods to help you assess the value of a company’s stocks.

Depending on the valuation methods you choose to use, you should make sure that you have employed the best practices and used the best tools to help you get accurate results.

Models of Equity Valuation

1. Discounted Cash Flow (DCF) 

The DCF model requires you to look at the future cash flow of the company you want to invest in to get an estimate of its investment value. 

This method assumes that if you look at the amount of money a company might earn in the future, you will be able to get the current value of the same investment. You should also look at how the company manages business cash flow to ensure that your estimates are accurate.

2. Book Value

Using this method requires you to calculate the value paid for an asset less depreciation. Depreciation, which is the loss of value of an asset, involves many aspects. If it is machinery, for instance, you might have to look at its wear and tear for a given period of time. You can use this method when working with companies with small growth and residual value.

3. Comparable Method

The comparable method requires you to compare the equity with other similar equities. For instance, if you are investing in stocks, you can get their equity valuation by comparing the company with its competitors or businesses doing the same thing. If you find discrepancies, you should be careful before investing in such stocks.

4. Market Value

Let us assume you are doing an equity valuation for company X using the market value method. You will need to look at other companies, similar to company X, that have been sold recently in the market. 

You can also use this method if you are looking for the value of a property or a company that is closely held. You can only use this method if there are many other companies to compare with the one whose valuation you are looking for.

5. Asset-Based Valuation

The asset-based valuation requires you to get all the assets of a company and add them together. It is one of the most common methods, especially when there are issues with liquidity or other concerns that might affect the operations of a company. You are required to subtract net liabilities from net assets for you to get the value of the company.

Equity Valuation Best Practices

1. Consistency is Key

Consistency is crucial when it comes to equity valuation. Even though you can remain discrete with your valuation methods and processes, ensure you have tracked the approaches you use. 

You should also ensure that these are the approaches used every time. This is important in instilling confidence and helping you to streamline the process of valuation.

2. Remain Compliant With Regulatory Requirements

There are different regulatory requirements that you need to observe when performing equity valuation of companies or stocks. If, for instance, you are running a private equity firm in the United States, you need to look at the ASC 820 Fair Value Measurements and Disclosures regulatory requirements.

3. Work With Experienced Professionals

You should make sure that you are working with experienced professionals or even forming a committee to help you. These people will provide you with support, transparency, and oversight in case of any conflicts.

To ensure that you have the most accurate valuation, rely on an advisory board at different points of the valuation process. These should be people coming from within and without the firm under evaluation.

4. Create Your Own Database

Evaluating the historical performance of a firm is important. However, even though you can rely on data from external sources, creating your own database is better. This database will help you look at estimates against sale prices, something that is very useful in equity valuation.

Using this data, you will tell if your valuations are on target, conservative, or aggressive. You do not want to find yourself in a situation where your equity valuations are far from accurate.

Conclusion

You can find different models and methods used in equity valuation. All of them serve different purposes, but you should make sure that you understand each one of them for your estimates to be accurate. As you can see above, you should also employ best practices and ensure that you are using the right tools and resources.

---

Become an Insider

Subscribe to get a free daily budget planner printable to help get your money on track!

Make passive money the right way. No spam.

First Name:
Email Address:

Leave this field empty if you're human: