Equity Valuation
This lesson includes Equity Valuation Vaulation of equity valuation process. You will learn about the basic steps to follow to find the fair value of a companys equity shares. How do you know this is a fair price? To ascertain thefair valueof a companys equity, the process ofequity valuationis utilized in financial markets.
Fair value Valustion an estimate of what a company is truly worth. Themarket priceof the equity shares is the price at Equity Valuation they are sold in the stock exchange. This may or may not be equal to the fair value. The difference between the fair value and its market price is theperceived mispricingand occurs mainly because each investor has a different perception of the same company. To understand this mispricing, one needs to master the art of Equity Valuation valuation.
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Different investors use different methods for estimating equity valuation, but the basic process remains more or less the same. There are 5 general steps that are usually followed. We will understand each of the steps with the help of an example.
ABC is in the automobile industry. It is based in and does the majority of its business in Europe.
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To ascertain the fair value of this company, youre required to adhere to the following process:. No company works in a silo. A companys performance depends on a variety of external factors. The first step in an equity valuation is usually atop-down researchon macroeconomic and industry factors that impact the company. For investing in ABC, you need to Valuaion the macroeconomic and geopolitical scenario in Europe where the company does the majority of its business — inflation, interest rates, risks, etc. Then, you need to be aware of the dynamics of the industry — its major players, growth and performance parameters, future projections, etc. Equity Valuation, you need to understand Equity Valuation business of the company — its products, future strategy, market share, customers, etc.
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This research will help you understand the type of market in which ABC Equity Valuation operating and give you an idea of parameters that are important for valuation. Based on the analysis of the industry and macroeconomic factors, you can make a reasonable forecast of the companysfuture financial performance- revenues, income, costs, etc. For ABC company, you need to forecast the future production, changes in its cost structures, sales, etc.]
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