We know that for making money in stocks, it is essential to measure the valuation of the company. But the question that arises is we talk about valuations all the time, but how to measure it?
In this post, I will let you know about some of the valuation parameters that are generally used. The calculation part is left untouched by me. These calculations are generally done by Excel sheets by investors. I will be providing these sheets free of cost in future.
- Discounted Cash flow(DFC)
This is one of the best valuation parameters that is used by investors. DCF analysis uses future free cash flow projections and then discounts them to arrive at its enterprise value. The enterprise value is next used to evaluate the potential for investment. If the value arrived through DCF analysis is higher than the current cost of investment, then this can be considered a good investment.
I know it sounds very complicated to you. I will be explaining it to you in my next posts.
- Balance Sheet Methods
There are several balance sheet methods such as the book value, Adjusted book value, and liquidation value. These are the methods which consider the value of the company lies in the balance sheet of the company.
I will be explaining each of one of them in my next posts.
- Asset valuation method
These are a lot of ways to access the Asset valuation of a company.When analyst measures the assets of the company, they generally look at the book value. The book value is most of the times lower than the market value. This is because the book value is recorded in the past. So the market value is also considered as well.
- The Comparables Approach
Here similar type of companies is compared side by side. The companies which have same businesses or the rivals of the company are generally compared with each other. Discrepancies in the value act as an opportunity. If the result arrived at shows that the company is undervalued, it is bought. And if the result shows that it is overvalued, then it is shorted to make money.
The comparable approach can be of two types:
- Primary comparable approach– Here the companies that are listed in the stock market is used to compare. The criteria used are enterprise value to sales(EV/S), Enterprise multiple, Price to earnings, price to book(P/B) and price to free cash flow(P/FCF).
- Secondary comparable approach-Here private companies are looked at. If a private equity or an investor has bought similar companies, then it can be considered a good investment by comparison.
I will be explaining all of them in details, one by one in my next posts.