What is Equity Valuation?

Significance

Equity valuations are conducted to measure the value of a company given its current assets and position in the market. These data points are valuable for shareholders and prospective investors who want to find out if the company is performing well, and what to expect with their stocks or investments in the near future. Equity-valuation formulas include the Dividend Discount Model, the Dividend Growth Model and the Price-Earnings Ratio.

Function

Investors who are considering multiple investments or outlining an investment strategy may request equity valuations of a company, to make the most informed investment decision. Valuation methods based on the equity of a company typically include a thorough analysis of cash accounts, as well as a forecast or projection of future dividends, future earnings (revenue) and the distribution of dividends.

Features

The total equity of a company is the sum of both tangible assets and intangible qualities. Tangible assets include working capital, cash, inventory and shareholder equity. Intangible qualities, or intangible "assets," may include brand potential, trademarks and stock valuations. Performance indicators include the price/earnings ratio, dividend yield, and the Earnings Before Interest, Depreciation and Amortization (EBIDA). The valuation may also take the firm's enterprise value (EV) into account; this is calculated by combining the net debt per share with the price per share.

Benefits

A thorough analysis of tangible and intangible assets allows prospective investors, shareholders and financial managers of a company to obtain critical performance data about the company's business operations. The equity valuation method takes several types of data into account, and can be used as part of a prediction model to determine the economic future of the company. The valuation also provides some indication of the level of risk involved in investing in the company.

Considerations

Identifying the dollar value of intangible assets can be a complicated process, and is typically undertaken by the financial manager or financial accountant. These assets may fluctuate significantly because of market conditions, but they do play an important role in equity valuation. Even though several financial ratios and factors are involved with the equity-valuation process, the final figures can provide a relatively accurate assessment of a company's financial status and revenue prospects.