Valuation is how investors put a number on what something is worth. Methods include comparing similar companies, discounting expected future cash flows, or looking at assets minus liabilities. Different methods can disagree, and every method rests on assumptions that can be wrong.
Key takeaways
- Market price is what buyers and sellers agree now. Valuation is an estimate of worth that may sit above or below that price.
- Simple ratios such as price to earnings are quick screens, not complete answers.
- Small changes in growth or discount rate assumptions can swing a model by a large amount.
- Honest valuation admits uncertainty rather than pretending there is one true price.