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A valuation helps to determine what a company is worth and whether its price is reasonable.
- The valuation of the company is inherently subjective;
- The objective of valuation is to find out what a willing buyer will pay to a willing seller;
- Valuation gives the cost basis for the investment;
- A lower valuation at the time of investment does provide investors with higher profits;
- “Moneyball” – is a good analogy. Buying undervalued players is very similar to buying undervalued stocks.
The absolute valuation is a process by which we assess the current intrinsic value of the company, independently of price.
Absolute valuation is based on 5-step process:
- Estimating long-term future cash-flows of the firm;
- Estimating the rate at which to discount those cash-flows to derive today’s value;
- Discount the estimated future cash-flows by the Weighted Average Cost of Capital (WACC);
- Take the total firm value and derive the market capitalization from it;
- Estimate fair share price.
Side-note: Estimating long-term future cash-flows is the most challenging step in the absolute valuation process. It involves making assumptions upon which future performance of a share will be projected.
Some of the main functions for performing absolute valuation within the Bloomberg Terminal are:
Every of the above function has its own distinct features which also depend on the type of security chosen. This lig guide provides a brief introduction to company and industry analysis, which are based on the Bloomberg Market Concept (BMC) course.