Why is Financial Valuation Important for Companies and Investors?

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A company possesses various assets and securities. Valuation is important to evaluate the present market value of an asset. Also when considering the viewpoint of a business, valuation is the method with the help of which a company analyses the hypothetical cost that another entity would pay to acquire the concerned asset. Liabilities can also come under financial valuation. Such valuation is performed to estimate the cost of discharging such liabilities.

Moreover, the term 'intrinsic value' talks about the perceived value of a security or an asset that can relent potential future income. Business analysts undertake valuation in order to determine whether a company's security or an asset is overpriced or underpriced in the current capital markets.

Understanding how to deal with financial services and conduct valuation in the capital markets is not easy. It can be tricky sometimes, but a good advanced management program is all one needs to get a hang of it. Read along to know why it is important for businesses and investors to perform the valuation.

What is Financial Valuation?

Financial valuation is the process of evaluating the present value of a company's worth, asset or stock in the capital markets. The valuation can be for the investments of the company or the various assets that a business owns. Business analysts who want to look at the prospective future of an organisation or want to ascertain the value of certain assets in the capital markets perform the financial valuation with the help of multiple valuation techniques.

The main motive behind conducting financial valuation is to evaluate the present standing of an asset or prospective investment area and what result it can yield in the future. Valuation in the capital markets is associated with insightful fundamental analysis which seeks to understand the fundamental drivers of a business. This, however, is exclusive of the core meaning of valuation.

Buyers and investors tend to deal a lot in the stock market. A financial services course can help one learn the process of valuation to effectively instil the knowledge of trade in securities and exchange. Such professionals can become an asset to a company for conducting reliable and safe valuations. 

Why Perform Financial Valuation?

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Valuation is an integral aspect of financial services as it can help to point out assets and securities that are wrongly priced. It also helps to recognise the area of investments that a company should focus on. Some major reasons why a company should perform valuation are stated as under:

Acquisition or disposal of business

Valuation is a great technique to come to a market value of a business when the owner wants to sell it and a buyer wants to acquire it. Mainly, buyers and sellers have differences in the valuation of a company. After discussions and mutual understanding, both parties come to a decision and final price or valuation that will lock the deal of buying and selling the business.

Strategic planning

The importance of strategic planning cannot be overruled. A financial management course can be a guide that can teach one the ideas of strategic planning. It also enables a company to make the right choice in which project to invest in and how to increase the net worth of the company. It creates value for the company and increases its profitability.

Investment financing

Another prime reason for conducting valuation is when a company needs to attract funds from banks or other financial institutions. From the viewpoint of investors, looking at the valuation of a company is important as it will give them an idea about the cash flow, credibility and creditworthiness of the company.

Investing in securities

A mere assumption about the present market value of a security does not reflect reliability. The market value of securities like a stock or a bond keeps on changing and it requires proper valuation at the time of investing. Thus, the determination of the inherent value requires running a valuation.

Increased Knowledge of the organisation's assets

Proper business valuation assessment is significantly important so that a company can avoid making generalised estimates and assumptions. Specific and meaningful valuation numbers are important for companies so that they can analyse how much to invest in and what areas. It also helps in obtaining appropriate insurance coverage and how to run the operations of the business so that it can yield profits.

Methods of Financial Valuation

There are several methods for valuing an organisation. Some of the major valuation techniques are stated as follows:

  • Market Capitalisation: Market capitalisation is the most straightforward and widely used approach to valuation. It is computed by dividing the share price of the company by the total number of outstanding shares.
  • Times Revenue Method: According to the Times revenue method of valuation, it is calculated by considering a stream of revenue produced within a predetermined period of time. The amount of revenue is then multiplied by a factor that is dependent on the particular sector and the state of the economy.
  • Earnings Multiplier: The earnings multiplier method gives a better and more accurate result when compared to the Times revenue method. It calculates the financial status of the company by looking at the profits and not the sales revenue. This method compares the profits that are projected to cash flow that might be invested for a specific amount of time at the current rate of interest.
  • Discounted Cash Flow Method (DCF): The DCF approach is based on projections and forecasts of future cash flow. it takes the factor of inflation into consideration and modifies the calculation to derive the company's present market value.¬†

Conclusion

Financial valuation is a complex process and it can be difficult for a young professional to learn it. However, an advanced management program can become a great helping hand for inculcating insightful knowledge about the techniques and ways of performing financial valuation.

Imarticus Learning offers the IIM Lucknow Capital Markets certification course that can help you to enhance your skills in the related field. This comprehensive course is your one-stop destination for inculcating all the major knowledge and techniques about valuation.

Consequently, if you wish to further your profession in finance or deepen your grasp of capital markets, think about signing up for the Advanced Management Program in Financial Services and Capital Markets by Imarticus.

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