As an investor or trader, it is highly essential to determine an asset’s value. If you are interested to invest in an asset or stock, then you must know the equity value. Equity valuation is a financial expression explaining the techniques, methods, and tools to find out a firm’s equity accurate value. In this article, we have covered the basics and methods of equity valuation and the best the equity valuation course, you can learn from and enhance your skills.
Equity evaluation is an important feature of an affluent investment decision. Every stock market participant either explicitly or implicitly makes use of stock valuation while undertaking investment decisions. For making investments in the equity markets, every investor, be it a large institutional firm or a small investor, opt for valuation of equity shares.
Individual investors make up a larger portion of the equity markets. This is aided by the increase in education level, participation in the stock market, and growing household wealth. It has been observed that under a pension management benefit approach, employers are ought to pay a certain amount at their employees’ retirements. Hence, to meet the needs, the owners tend to invest in the employees’ pension funds.
Furthermore, in the light of a contribution approach, employers deposit a certain amount in their employees’ pension account at certain periods. Subsequently, the employees are encouraged to invest in various financial instruments like equity market indices. On the other hand, institutional investors aggregate the capital received from smaller entities and invest in the financial markets.
Why is asset value important?
An asset’s intrinsic value is of utmost importance. If an asset has a high intrinsic value, then it is believed that it will command a high price. On the contrary, an asset with low intrinsic value will command a low price. Various factors influence the price command. Distortions in the short run can lead to a low intrinsic valued asset to command high in the future. The factors that influence the stock are:
- Business management
- Macroeconomic variables
- Firm’s financial health
- Profits of the firm.
The valuation of shares of a firm is highly essential if an investor is looking forward to making high profits in the equity markets. The profit is also dependent on the organization’s underlying business at the close of the day. To successfully conduct equity valuation, there are various equity valuation models, like the Discounted Cash Flow (DCF) valuation, Comparable Method, Market Method, and Book Value Method.
We have briefly described the various methods in the following segment, but if you want to broaden your knowledge horizon, then enroll in the top equity valuation course. We have mentioned the top equity valuation courses in the latter section of the article.
Methods of Equity Valuation
As already mentioned, there are four types of equity valuation methods. Let’s learn about the models in brief below.
1. Discounted Cash Flow or DCF Method
DCF is a valuation method through which present investment value is estimated grounded on future cash flows. This method is based on future speculations of how much profit will be earned, estimating the investment value today.
An investor can apply DCF by estimating future cash flows and the closing value of the asset or equity. The investor must choose a suitable discount rate, that will depend on the project or investment concerning the same. If the investor fails to estimate the future cash flows, then this equity valuation method should be cancelled and other appropriate methods should be used.
2. Comparable Method
The Comparable Model is based on the concept that the equity value of a specific firm should show a similarity to other equities. While stock evaluation, you can compare your organization to your competitors or businesses that run on the same idea. If you find out that a certain equity is undervalued then, you can buy it and hold it until its price rises.
Under the Comparable Method, we find two of its type. One is market comparables from its rival firms and peers. This is the most common approach. The usual market multiples are enterprise value to sales, price to book, price to earnings, and price to free cash flow. An investor looks at the margins and then compares with the rivals or peers. If the firm has averages lower than that of rivals or peers, then it is estimated to have a significant value increase.
In the second type, investors look over market transactions where organizations were acquired by rivals, equity firms, or rich investors. You can lucidly estimate an equity’s value with this approach. With the help of market statistics, you can compare a company with its rivals. Here, the multiples serve as a rational estimate for the company’s value.
3. Market Value Method
In this equity valuation method, you compare your company with companies similar to yours that have been recently sold. This method is specifically used to determine the value of a company’s portion and is applicable when there is a substantial number of firms similar to yours. Nonetheless, this method is also used to determine business ownership’s value interest, intangible assets, and security. Under this approach, there are two other methods.
- The Guideline Transaction Method, this approach uses prices of related firms sold recently.
- The Guideline Public Company Method, this approach uses prices of similar firms sold recently.
- Book Value Method
In this approach, it is the price paid for the asset excluding depreciation. The value loss of an asset can be due to various factors including wear and tear of equipment or machinery over the years. An investor uses this method for companies where the growth is less and it has less residual value. For instance, during a financial crisis, investors look at the book value of banks. The book value serves as the “break-up” value of these institutions.
These were the approaches to equity valuation. Without any prior knowledge and understanding of equity, these methods might sound confusing and tough. But, you can easily get through these terms and earn profits by availing yourself of the best equity valuation course.
Top Equity Valuation Course
Below we have listed the two most popular equity valuation course for Indian Stock Market enthusiasts.
1. Equity Valuation: How to Value a Stock? by Elearnmarkets
This is the best equity valuation course of recent time. Elearnmarkets is an online financial e-learning site with the aim of spreading financial literacy across India. It houses a myriad of courses on the stock market from its basics to fundamental analysis to technical analysis.
In this course of Equity Valuation, the aim is to teach the participants absolute and relative valuation methodologies that are used for value investing. With the help of case studies, you will learn share valuation through DCF and other models and get comprehensive knowledge about share valuation.
The topics that are covered in the course include preparation of DCF model, stock valuation decision-making, financial models’ construction, sheets inter-linking, and much more. With this course, you will be able to build a sophisticated and sturdy ground in equity valuation.
This course perfectly fits equity analysts, investors, MBA finance students, CA, CMA, CS students, and anyone who has stepped into the stock market world and is eager to learn.
2. Corporate Finance 101: Equity Valuation by Udemy
Another course we are featuring for its popularity is Corporate Finance 101: Equity Valuation by Udemy. This is no new news that Udemy is a top-class e-learning portal for a variety of subjects and topics. It has attracted students from different domains and built its platform.
In this course, the participants will understand and learn company valuation, risks and returns, the importance of cash flow, and the application of different equity valuation models. It also focuses on the estimation of a firm’s intrinsic value, FCF valuation, free cash flows, and other such crucial topics.
This course rightly fits CFA candidates, MBA students, stock market enthusiasts, and accountants.
With the right equity valuation course, you are ought to get comprehensive and knowledge-strengthening information about equity valuation. Equity valuation is highly crucial for assessing an asset’s intrinsic value. The different models and approaches are important to determine an asset’s value as perfectly as possible to make money in the stock market.