In
finance
Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...
, valuation is the process of determining the
value of a (potential) investment, asset, or security.
Generally, there are three approaches taken, namely discounted cashflow valuation, relative valuation, and contingent claim valuation.
Valuations can be done for
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...
s (for example, investments in marketable securities such as companies'
shares and related rights,
business
Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for ...
enterprises, or
intangible asset
An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, exclusive franchises, Goodwill (accounting), goodwill, trademarks, and trade names, reputation, Research and development, R&D, Procedural knowledge, ...
s such as
patent
A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an sufficiency of disclosure, enabling discl ...
s,
data
Data ( , ) are a collection of discrete or continuous values that convey information, describing the quantity, quality, fact, statistics, other basic units of meaning, or simply sequences of symbols that may be further interpreted for ...
and
trademark
A trademark (also written trade mark or trade-mark) is a form of intellectual property that consists of a word, phrase, symbol, design, or a combination that identifies a Good (economics and accounting), product or Service (economics), service f ...
s)
or for
liabilities (e.g.,
bonds issued by a company).
Valuation is a subjective exercise, and in fact, the process of valuation itself can also affect the value of the asset in question.
Valuations may be needed for various reasons such as
investment analysis,
capital budgeting
Capital budgeting in corporate finance, corporate planning and accounting is an area of capital management that concerns the planning process used to determine whether an organization's long term capital investments such as new machinery, repla ...
,
merger
Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...
and
acquisition transactions,
financial reporting, taxable events to determine the proper
tax
A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...
liability.
In a
business valuation
Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing ...
context, various techniques are used to determine the (hypothetical) price that a third party would pay for a given company;
while in a
portfolio management context,
stock valuation is used by
analysts to determine the ''price'' at which the stock is fairly valued relative to its projected and historical earnings, and to thus profit from related price movement.
Valuation overview
Common terms for the value of an asset or liability are
market value,
fair value
In accounting, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. The derivation takes into account such objective factors as the costs associated with production or replacement, market c ...
, and
intrinsic value. The meanings of these terms differ. For instance, when an analyst believes a stock's intrinsic value is greater (or less) than its market price, an analyst makes a "buy" (or "sell") recommendation. Moreover, an asset's intrinsic value may be subject to personal opinion and vary among analysts. The
International Valuation Standards include definitions for common bases of value and generally accepted practice procedures for valuing assets of all types. Regardless, the valuation itself is done generally using one or more of the following approaches:
#Absolute value models ("
Intrinsic valuation") that determine the present value of an asset's expected future cash flows. These models take two general forms: multi-period models such as
discounted cash flow models, or single-period models such as the
Gordon model (which, in fact, often
"telescope" the former). These models rely on mathematics rather than price observation. See .
#
Relative value models determine value based on the observation of market prices of 'comparable' assets, relative to a common variable like earnings, cashflows, book value or sales. This result will often be used to complement / revisit the intrinsic valuation. See .
#
Option pricing models, in this context, are used to value specific balance-sheet items, or the asset itself, when these have option-like characteristics. Examples of the first type are
warrants,
employee stock option
Employee stock options (ESO or ESOPs) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of Options (finance), financial options.
Employee stock options are commonly viewed as ...
s, and
investment
Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
s with
embedded option
An embedded option
is a component of a financial bond or other security, which provides the bondholder or the issuer the right to take some action against the other party. There are several types of options that can be embedded into a bond; comm ...
s such as
callable bonds; the second type are usually
real options
Real options valuation, also often termed real options analysis,Adam Borison (Stanford University)''Real Options Analysis: Where are the Emperor's Clothes?''
(ROV or ROA) applies option (finance), option Valuation of options, valuation technique ...
. The most common option pricing models employed here are the
Black–Scholes-
Merton models,
lattice models
Lattice may refer to:
Arts and design
* Latticework, an ornamental criss-crossed framework, an arrangement of crossing laths or other thin strips of material
* Lattice (music), an organized grid model of pitch ratios
* Lattice (pastry), an ...
and
Monte Carlo simulations. This approach is sometimes referred to as
contingent claim valuation, in that the value will be contingent on some other asset. See .
Usage
In finance, valuation analysis is required for many reasons including tax assessment,
wills and
estates,
divorce
Divorce (also known as dissolution of marriage) is the process of terminating a marriage or marital union. Divorce usually entails the canceling or reorganising of the legal duties and responsibilities of marriage, thus dissolving the M ...
settlements, business analysis, and basic
bookkeeping
Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business. T ...
and
accounting
Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...
. Since the value of things fluctuates over time, valuations are as of a specific date like the end of the accounting quarter or year. They may alternatively be
mark-to-market estimates of the current value of assets or liabilities as of this minute or this day for the purposes of managing portfolios and associated financial risk (for example, within large financial firms including
investment banks and stockbrokers).
Some balance sheet items are much easier to value than others. Publicly traded stocks and bonds have prices that are quoted frequently and readily available. Other assets are harder to value. For instance, private firms that have no frequently quoted price. Additionally, financial instruments that have prices that are partly dependent on theoretical models of one kind or another are difficult to value and this generates
valuation risk. For example, options are generally valued using the
Black–Scholes model while the liabilities of
life assurance firms are valued using the theory of
present value
In economics and finance, present value (PV), also known as present discounted value (PDV), is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money ha ...
. Intangible business assets, like
goodwill and
intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, co ...
, are open to a wide range of value interpretations. Another intangible asset,
data
Data ( , ) are a collection of discrete or continuous values that convey information, describing the quantity, quality, fact, statistics, other basic units of meaning, or simply sequences of symbols that may be further interpreted for ...
, is increasingly being recognized as a valuable asset in the information economy.
It is possible and conventional for financial professionals to make their own estimates of the valuations of assets or liabilities that they are interested in. Their calculations are of various kinds including analyses of companies that focus on price-to-book, price-to-earnings, price-to-cash-flow and
present value
In economics and finance, present value (PV), also known as present discounted value (PDV), is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money ha ...
calculations, and analyses of bonds that focus on credit ratings, assessments of
default risk,
risk premia, and levels of
real interest rates. All of these approaches may be thought of as creating estimates of value that compete for credibility with the prevailing share or bond prices, where applicable, and may or may not result in buying or selling by market participants. Where the valuation is for the purpose of a
merger or acquisition the respective businesses make available further detailed financial information, usually on the completion of a
non-disclosure agreement.
Valuation requires judgment and assumptions:
* There are different circumstances and purposes to value an asset (e.g., distressed firm, tax purposes, mergers and acquisitions, financial reporting). Such differences can lead to different valuation methods or different interpretations of the method results
* All valuation models and methods have limitations (e.g., degree of complexity, relevance of observations, mathematical form)
* Model inputs can vary significantly because of necessary judgment and differing assumptions
Users of valuations benefit when key information, assumptions, and limitations are disclosed to them. Then they can weigh the degree of reliability of the result and make their decision.
Business valuation
Business
Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for ...
es or fractional interests in businesses may be valued for various purposes such as
mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...
, sale of
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
, and taxable events. When correct, a valuation should reflect the capacity of the business to match a certain market demand, as it is the only true predictor of future cash flows. An accurate valuation of
privately owned companies largely depends on the reliability of the firm's historic financial information.
Public company
A public company is a company whose ownership is organized via shares of share capital, stock which are intended to be freely traded on a stock exchange or in over-the-counter (finance), over-the-counter markets. A public (publicly traded) co ...
financial statement
Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s are audited by
Certified Public Accountants (USA),
Chartered Certified Accountants (
ACCA) or
Chartered Accountants (UK), and
Chartered Professional Accountants (Canada) and overseen by a government regulator. Alternatively, private firms do not have government oversight—unless operating in a regulated industry—and are usually not required to have their financial statements audited. Moreover, managers of private firms often prepare their financial statements to minimize profits and, therefore,
taxes
A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...
. Alternatively, managers of public firms tend to want higher profits to increase their stock price. Therefore, a firm's historic financial information may not be accurate and can lead to over- and undervaluation. In an acquisition, a buyer often performs
due diligence to verify the seller's information.
Financial statements prepared in accordance with
generally accepted accounting principles
Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on t ...
(GAAP) show many assets based on their historic costs rather than at their current market values. For instance, a firm's
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
will usually show the value of land it owns at what the firm paid for it rather than at its current market value. But under GAAP requirements, a firm must show the fair values (which usually approximates market value) of some types of assets such as financial instruments that are held for sale rather than at their original cost. When a firm is required to show some of its assets at fair value, some call this process "
mark-to-market". But reporting asset values on financial statements at fair values gives managers ample opportunity to slant asset values upward to artificially increase profits and their stock prices. Managers may be motivated to alter earnings upward so they can earn bonuses. Despite the risk of manager bias, equity investors and creditors prefer to know the market values of a firm's assets—rather than their historical costs—because current values give them better information to make decisions.
There are commonly three pillars to valuing business entities: comparable company analyses, discounted cash flow analysis, and precedent transaction analysis. Business valuation credentials include the Chartered Business Valuator (CBV) offered by the
CBV Institute, ASA and CEIV from the
American Society of Appraisers, and the CVA by the National Association of Certified Valuators and Analysts.
Discounted cash flow method
This method estimates the value of an asset based on its expected future cash flows, which are discounted to the present (i.e., the present value). This concept of discounting future money is commonly known as the
time value of money
The time value of money refers to the fact that there is normally a greater benefit to receiving a sum of money now rather than an identical sum later. It may be seen as an implication of the later-developed concept of time preference.
The time ...
. For instance, an asset that matures and pays $1 in one year is worth less than $1 today. The size of the discount is based on an
opportunity cost of capital and it is expressed as a percentage or
discount rate.
In finance theory, the amount of the
opportunity cost is based on a relation between the risk and return of some sort of investment.
Classic economic theory maintains that people are rational and averse to risk. They, therefore, need an incentive to accept risk. The incentive in finance comes in the form of higher expected returns after buying a risky asset. In other words, the more risky the investment, the more return investors want from that investment. Using the same example as above, assume the first investment opportunity is a government bond that will pay interest of 5% per year and the principal and interest payments are guaranteed by the government. Alternatively, the second investment opportunity is a bond issued by small company and that bond also pays annual interest of 5%. If given a choice between the two bonds, virtually all investors would buy the government bond rather than the small-firm bond because the first is less risky while paying the same interest rate as the riskier second bond. In this case, an investor has no incentive to buy the riskier second bond. Furthermore, in order to attract capital from investors, the small firm issuing the second bond must pay an interest rate higher than 5% that the government bond pays. Otherwise, no investor is likely to buy that bond and, therefore, the firm will be unable to raise capital. But by offering to pay an interest rate more than 5% the firm gives investors an incentive to buy a riskier bond.
For a
valuation using the
discounted cash flow method, one first estimates the future cash flows from the investment and then estimates a reasonable discount rate after considering the riskiness of those cash flows and interest rates in the
capital markets. Next, one makes a calculation to compute the present value of the future cash flows.
Guideline companies method
This method determines the value of a firm by observing the prices of similar companies (called "guideline companies") that sold in the market. Those sales could be shares of stock or sales of entire firms. The observed prices serve as valuation benchmarks. From the prices, one calculates
price multiples such as the
price-to-earnings or
price-to-book ratios—one or more of which used to value the firm. For example, the average price-to-earnings multiple of the guideline companies is applied to the subject firm's earnings to estimate its value.
Many price multiples can be calculated. Most are based on a financial statement element such as a firm's earnings (price-to-earnings) or book value (price-to-book value) but multiples can be based on other factors such as price-per-subscriber.
Net asset value method
The third-most common method of estimating the value of a company looks to the
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...
s and
liabilities of the business. At a minimum, a
solvent
A solvent (from the Latin language, Latin ''wikt:solvo#Latin, solvō'', "loosen, untie, solve") is a substance that dissolves a solute, resulting in a Solution (chemistry), solution. A solvent is usually a liquid but can also be a solid, a gas ...
company could shut down operations, sell off the assets, and pay the
creditor
A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...
s. Any cash that would remain establishes a floor value for the company. This method is known as the
net asset value
Net asset value (NAV) is the value of an entity's assets minus the value of its Liability (financial accounting), liabilities, often in relation to open-end fund, open-end, mutual fund, mutual funds, Hedge fund, hedge funds, and Venture capital, v ...
or cost method. In general the
discounted cash flows of a well-performing company exceed this floor value. Some companies, however, are worth more "dead than alive", like weakly performing companies that own many tangible assets. This method can also be used to value heterogeneous portfolios of investments, as well as
nonprofit
A nonprofit organization (NPO), also known as a nonbusiness entity, nonprofit institution, not-for-profit organization, or simply a nonprofit, is a non-governmental (private) legal entity organized and operated for a collective, public, or so ...
s, for which discounted cash flow analysis is not relevant. The valuation premise normally used is that of an orderly
liquidation
Liquidation is the process in accounting by which a Company (law), company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as :wikt:wind up#Noun, w ...
of the assets, although some valuation scenarios (e.g.,
purchase price allocation) imply an "
in-use" valuation such as
depreciated replacement cost new
This method is most appropriate in situations where there are no significant intangible assets, or when a company is voluntarily liquidating its assets as a result of ceased operations.
An alternative approach to the net asset value method is the excess earnings method. (This method was first described in the U.S.
Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the Federal government of the United States, United States federal government, which is responsible for collecting Taxation in the United States, U.S. federal taxes and administerin ...
's ''Appeals and Review Memorandum'' 34, and later refined b
Revenue Ruling 68-609) The excess earnings method has the appraiser identify the value of tangible assets, estimate an appropriate return on those tangible assets, and subtract that return from the total return for the business, leaving the "excess" return, which is presumed to come from the intangible assets. An appropriate capitalization rate is applied to the excess return, resulting in the value of those intangible assets. That value is added to the value of the tangible assets and any non-operating assets, and the total is the value estimate for the business as a whole. See
Clean surplus accounting,
Residual income valuation.
Specialised cases
The approaches to valuation outlined above, are generic and will be modified for the unique positioning and characteristics
of the business in question.
In the below cases, however, more specific valuation-practices
have developed
within the
investment industry.
To these, more than elsewhere,
real options valuation
Real options valuation, also often termed real options analysis,Adam Borison (Stanford University)''Real Options Analysis: Where are the Emperor's Clothes?''
(ROV or ROA) applies option (finance), option Valuation of options, valuation technique ...
may be applied;
see .
Valuation of a suffering company
Investors in a
suffering company, or in other "
distressed securities", may intend
(i) to
restructure the business, with the valuation
reflecting its potential thereafter,
or
(ii) to purchase the company - or its debt - at a discount,
as part of an Investment Strategy aimed at
realizing a profit on recovery.
Preliminary to the valuation, the
financial statements are
initially recast, to "better reflect the firm's indebtedness, financing costs and recurring earnings".
Here adjustments are made to
working capital, deferred
capital expenditures,
cost of goods sold
Cost of goods sold (COGS) (also cost of products sold (COPS), or cost of sales) is the carrying value of goods sold during a particular period.
Costs are associated with particular goods using one of the several formulas, including specific iden ...
, non-recurring professional fees and costs, above- or below-market leases, excess salaries in the case of
private companies, and certain non-operating income/expense items.
The valuation is built on this base, with any of the standard market-, income-, or asset-based approaches employed. Often these are used in combination, providing a "triangulation" or (weighted) average.
Particularly in the second case above, the company may be valued using
real options analysis, serving to complement (or sometimes replace) this standard value; see and
Merton model.
As required, various adjustments are then made to this result, so as to reflect characteristics of the firm external to its profitability and cash flow. These adjustments consider any
lack of marketability resulting in a discount, and re the stake in question, any
control premium or
lack of control discount.
Balance sheet items external to the valuation, but due to the new owners, are similarly recognized; these include excess (or restricted) cash, and other non-operating assets and liabilities.
Valuation of a startup company
Startup companies such as
Uber
Uber Technologies, Inc. is an American multinational transportation company that provides Ridesharing company, ride-hailing services, courier services, food delivery, and freight transport. It is headquartered in San Francisco, California, a ...
, which was valued at $50 billion in early 2015, are assigned
post-money valuations based on the price at which their most recent investor put money into the company. The price reflects what investors, for the most part
venture capital
Venture capital (VC) is a form of private equity financing provided by firms or funds to start-up company, startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in ...
firms, are willing to pay for a share of the firm. They are not listed on any stock market, nor is the valuation based on their assets or profits, but on their potential for success, growth, and eventually, possible profits.
Many startup companies use internal growth factors to show their potential growth which may attribute to their valuation.
The professional investors who fund startups are experts, but hardly infallible, see
Dot-com bubble.
Valuation using discounted cash flows discusses various considerations here.
The valuation of early-stage startups
can be more nuanced due to their lack of established track records. One common approach is using comparative valuations, although this method can be less accurate given the uniqueness of each startup. Some methods adjust the average
pre-money valuation of pre-revenue startups based on various attributes within the same market. Average pre-money valuations in a particular region or sector, obtained from recent market deals, can also serve as reference points. During
Series A funding rounds, the typical valuation for startups is reported to be between $10 million to $15 million.
Valuation of intangible assets
Valuation models can be used to value
intangible asset
An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, exclusive franchises, Goodwill (accounting), goodwill, trademarks, and trade names, reputation, Research and development, R&D, Procedural knowledge, ...
s such as for
patent valuation, but also in
copyright
A copyright is a type of intellectual property that gives its owner the exclusive legal right to copy, distribute, adapt, display, and perform a creative work, usually for a limited time. The creative work may be in a literary, artistic, ...
s,
software
Software consists of computer programs that instruct the Execution (computing), execution of a computer. Software also includes design documents and specifications.
The history of software is closely tied to the development of digital comput ...
,
trade secret
A trade secret is a form of intellectual property (IP) comprising confidential information that is not generally known or readily ascertainable, derives economic value from its secrecy, and is protected by reasonable efforts to maintain its conf ...
s, and customer relationships.
As economies are becoming increasingly informational, it is recognized that there is a need for new methods to
value data, another intangible asset.
Valuations here are often necessary both for
financial reporting and
intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, co ...
transactions.
They are also inherent in
securities analysis - listed and
private - in cases where
analysts must estimate the
incremental contribution of patents (etc) to equity value; see next paragraph.
Since few sales of benchmark intangible assets can ever be observed, one often values these sorts of assets using either a present value model, or by
estimating the cost of recreating the asset in question.
In some cases,
[Kellogg, D., & Charnes, J. M. (2000)]
Real-Options Valuation for a Biotechnology Company
'' Financial Analysts Journal'', 56(3), 76–84.
option-based techniques or
decision tree
A decision tree is a decision support system, decision support recursive partitioning structure that uses a Tree (graph theory), tree-like Causal model, model of decisions and their possible consequences, including probability, chance event ou ...
s may be applied.
Regardless of the method, the process is often time-consuming and costly.
If required, stock markets can give an indirect estimate of a corporation's intangible asset value: this can be reckoned as the difference between its
market capitalisation and its
book value (including
only hard assets), i.e. effectively its
goodwill; see also
PVGO.
As regards listed equity, the above techniques are most often applied in the
biotech-,
life sciences- and
pharmaceutical sectors
[T. Segal (2020)]
Biotech vs. Pharmaceuticals
, investopedia.com
(see
List of largest biotechnology and pharmaceutical companies).
These businesses are involved in
research and development
Research and development (R&D or R+D), known in some countries as OKB, experiment and design, is the set of innovative activities undertaken by corporations or governments in developing new services or products. R&D constitutes the first stage ...
(R&D), and testing, that typically takes years to complete, and where the new product may ultimately
not be approved (see
Contingent value rights).
Industry specialists thus apply the above techniques - and here especially
rNPV - to the
pipeline of products under development, and, at the same time,
[Aswath Damodaran (N.D.)]
The Value of Intangibles
also estimate the impact on existing revenue streams due to
expiring patents.
For relative valuation,
a specialized ratio is R&D spend as a percentage of sales.
Similar analysis may be applied to
options on films re the valuation of
film studios
A film studio (also known as movie studio or simply studio) is a major entertainment company that makes films. Today, studios are mostly financing and distribution entities. In addition, they may have their own studio facility or facilities; howev ...
.
Valuation of mining projects
In
mining
Mining is the Resource extraction, extraction of valuable geological materials and minerals from the surface of the Earth. Mining is required to obtain most materials that cannot be grown through agriculture, agricultural processes, or feasib ...
, valuation is the process of determining the value or worth of a
mining property - i.e. as distinct from a listed mining corporate. Mining valuations are sometimes required for
IPOs,
fairness opinions, litigation, mergers and acquisitions, and shareholder-related matters. In valuing a mining project or mining property,
fair market value is the standard of value to be used.
In general,
[ Queen's University (2010)]
Project Evaluation Methods
/ref>
this result will be a function of the property's "reserve" - the estimated size and grade of the deposit in question - and the complexity and costs of extracting this.[Andrew Beattie (2020)]
A Beginner's Guide to Mining Stocks
CIMVal
' generally applied by the Toronto Stock Exchange, is widely recognized as a "standard" for the valuation of mining projects. (CIMVal: Canadian Institute of Mining, Metallurgy and Petroleum on Valuation of Mineral Properties
)
The Australasian equivalent i
''VALMIN''
the Southern African is ''SAMVAL''.
These standards stress the use of the cost approach, market approach, and the income approach, depending on the stage of development of the mining property or project;
see [E.V. Lilford and R.C.A. Minnitt (2005)]
A comparative study of valuation methodologies for mineral developments
, ''The Journal of The South African Institute of Mining and Metallurgy'', Jan. 2005 for further discussion and context.
Real Options analysis
[Shafiee, S and Abbate, N. (2012).]
Now, this is the Time for Mining Companies to Choose - Real Option Valuation or Discount Cash Flow
Australasian Institute of Mining and Metallurgy
is sometimes
used when there is a need to evaluate the project under different scenarios from inception.
Analyzing listed mining corporates (and other resource companies) is also specialized,
as the valuation requires a good understanding of the company's overall assets, its operational business model as well as key market drivers,
and an understanding of that sector of the stock market.
Re the latter, a distinction is usually made based on size and financial capabilities; see .
*The price of a "Junior" mining stock, typically having one asset, will at its early stages be linked to the result of its feasibility study
A feasibility study is an assessment of the practicality of a project or system. A feasibility study aims to objectively and rationally uncover the strengths and weaknesses of an existing business or proposed venture, opportunities and threats pr ...
; later, the price will be a function of that mine's viability and value, largely applying the above techniques.
*A "Major", on the other hand, has numerous properties
Property is the ownership of land, resources, improvements or other tangible objects, or intellectual property.
Property may also refer to:
Philosophy and science
* Property (philosophy), in philosophy and logic, an abstraction characterizing an ...
, and the contents of any single deposit will impact stock value in a limited fashion; this due to diversification, access to funding, and, also, since the share price inheres goodwill. Typically, then, the exposure is more to the market value of each mineral in the portfolio, than to the individual properties.
Valuing financial services firms
There are two main difficulties with valuing financial services
Financial services are service (economics), economic services tied to finance provided by financial institutions. Financial services encompass a broad range of tertiary sector of the economy, service sector activities, especially as concerns finan ...
firms.
[Aswath Damodaran (2009)]
''Valuing Financial Service Firms''
, Stern, NYU
[Doron Nissim (2010]
''Analysis and Valuation of Insurance Companies''
, Columbia Business School
Columbia Business School (CBS) is the business school of Columbia University, a Private university, private research university in New York City. Established in 1916, Columbia Business School is one of six Ivy League business schools and one of ...
[Yann Le Fur, ''et. al.'' (2022)]
"Putting a value on banks"
/ref>
[Richard Goldfarb (2010)]
“P&C Insurance Company Valuation”
Casualty Actuarial Society
The first is that the cash flows to a financial service firm cannot be easily estimated, since capital expenditures, working capital and debt are not clearly defined:
"debt for a financial service firm is more akin to raw material than to a source of capital; the notion of cost of capital and enterprise value
Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecure ...
may be meaningless as a consequence."
(See related discussion re. the risk management
Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...
of financial- vs non-financial firms.)
The second is that these firms operate under a highly regulated environment, and valuation assumptions ( and model outputs) must incorporate regulatory limits, at least as "bounds".
The approach taken for a DCF valuation, is to then "remove" debt from the valuation, by discounting at the cost of equity either free cash flow to equity (here, net income
In business and Accountancy, accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and Amortization (a ...
less any reinvestment in regulatory capital) or excess return; a dividend based valuation is often employed. This is in contrast to the more typical approach of discounting free cash flow to the ''Firm'' where EBITDA
A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, state-mandat ...
less capital expenditures and working capital is discounted at the weighted average cost of capital, which incorporates the cost of debt.
For a multiple based valuation, similarly, price to earnings is preferred to EV/EBITDA
Enterprise value/ EBITDA (more commonly referred to by the acronym EV/EBITDA) is a popular valuation multiple used to determine the fair market value of a company. By contrast to the more widely available P/E ratio (price-earnings ratio) it incl ...
.
Here, there are also industry-specific measures used to compare between investments and within sub-sectors; this, once normalized by market cap (or other appropriate result), and recognizing regulatory differences:
*Insurance companies
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect ...
: embedded value
The Embedded Value (EV) of a life insurance company is the present value of future profits plus adjusted net asset value. It is a construct from the field of actuarial science which allows insurance companies to be valued.
Background
Life insuranc ...
and actuarial reserves
* Banking sector: net interest margin and provision for credit losses
* Wealth- and investment management
Investment management (sometimes referred to more generally as financial asset management) is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as r ...
firms: assets under management
In finance, assets under management (AUM), sometimes called fund under management, refers to the total market value of all financial assets that a financial institution—such as a mutual fund, venture capital firm, or depository institutio ...
* Investment banks: price to tangible book value and return on tangible equity.
Mismarking
Mismarking in securities valuation takes place when the value that is assigned to securities does not reflect what the securities are actually worth, due to intentional fraudulent mispricing.
Mismarking misleads investors and fund executives about how much the securities in a securities portfolio managed by a trader are worth (the securities' net asset value
Net asset value (NAV) is the value of an entity's assets minus the value of its Liability (financial accounting), liabilities, often in relation to open-end fund, open-end, mutual fund, mutual funds, Hedge fund, hedge funds, and Venture capital, v ...
, or NAV), and thus misrepresents performance.[Kent Oz (2009)]
"Independent Fund Administrators As A Solution for Hedge Fund Fraud,"
''Fordham Journal of Corporate & Financial Law''.
When a rogue trader engages in mismarking, it allows him to obtain a higher bonus from the financial firm for which he works, where his bonus is calculated by the performance of the securities portfolio that he is managing.
See also
* Appraisal (disambiguation)
* Asset price inflation
* Business valuation
Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing ...
* Business valuation standard
* Control premium
* Depreciation
In accountancy, depreciation refers to two aspects of the same concept: first, an actual reduction in the fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation i ...
* Earnings response coefficient
* Efficient-market hypothesis
* Enterprise value
Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecure ...
* Equity value
* Film finance
* Fundamental analysis
* Intellectual property valuation
* Intermediated research
* Investment management
Investment management (sometimes referred to more generally as financial asset management) is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as r ...
* Lipper average Lipper Average also known as Lipper Index are a series of indices produced by Lipper, a subsidiary of Thomson Reuters, that establish benchmarks to measure the performance of a portfolio, or of various mutual funds and exchange-traded funds. The ...
* Market-based valuation
* Minority discount Minority discount is an economic concept reflecting the notion that a partial ownership interest may be worth less than its proportional share of the total business. The concept applies to equities with voting power because the size of voting positi ...
* Paper valuation
* Patent valuation
* PEG ratio
* Present value
In economics and finance, present value (PV), also known as present discounted value (PDV), is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money ha ...
* Present value of growth opportunities
* Price discovery
* Pricing
* Real options valuation
Real options valuation, also often termed real options analysis,Adam Borison (Stanford University)''Real Options Analysis: Where are the Emperor's Clothes?''
(ROV or ROA) applies option (finance), option Valuation of options, valuation technique ...
* Real estate appraisal
* Standard cost accounting
* Stock valuation
* Sum-of-the-parts analysis
* Terminal value
* Undervalued stock
* Valuation risk
*Specific pricing models
** Capital asset pricing model
** Arbitrage pricing theory
In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross (economist), Stephen Ross i ...
** Black–Scholes (for options)
** Fuzzy pay-off method for real option valuation
** Single-index model
** Markov switching multifractal
** Multiple factor models
References
{{Authority control
Financial markets
Financial economics