Do we know the value of the apartment that is up for sale? By how much is the price of the highly marketed IPO of a new age company over its intrinsic value?
It has become increasingly important today to know how to value an asset. It cannot be considered as an obscure area left to be dealt only by the experts. The topic has moved from the realm of sophisticated investment and portfolio management to everyday financial decisions.
We do not need to have complicated models to arrive at an intrinsic value. A simple and well thought out approach with the available data can do. We are trying to determine the worth of an asset and the drivers which contribute to its worth. As we are forecasting its futuristic value, no one approach can be accurate with utmost precision. We are bound to make an error; we just try not to deviate from the reality as much as possible.
Valuation starts with the cash flows, but the company needs to invest more in order to generate profits. So the uncertainties associated with new age business models should not shun any investors in attempting an independent valuation of the company. We know that the market is never going to be certain in any order!
Valuation can play a minimal role for passive investing, but it is central to any fundamental analysis. If we are pouring over financial statements, we need to understand the fair value used in accounting. If a founder is looking to get some investors on board, he/she needs to value the company to understand the share to be offered for a certain price. If a company is looking to borrow to meet its investment/working capital needs, it should value it to arrive at the borrowing terms. For a company looking to acquire a target, it needs to value the synergy expected out of acquisition and arrive at the fair price.
From fair value accounting to venture capital investing, from acquisition price to borrowing terms – we need to understand the fundamentals of valuation.
