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Chapter 8.3

Valuation

An investment is considered a valuable investment only if a good stock is bought at a great price. Price of a stock can be estimated by valuation techniques. By using valuation technique we calculate the intrinsic value of a stock which is perceived value of stock price of a company keeping all future cash flows in mind. We use methods like Market Multiple and discounted cash flow (DCF) method to calculate the value of a stock or business.


The basic of Market Multiple approach is that an equity’s value should bear some resemblance to other equities in a similar class. For a stock, this can simply be determined by comparing a firm to its key rivals, or at least those rivals that operate similar businesses. Differences in the value between similar firms could present opportunity. It means the equity being valued is either undervalued and can be bought and held until the value increases. The opposite can be true, which could present opportunity for selling the stock.

The basic of Market Multiple approach is that an equity’s value should bear some resemblance to other equities in a similar class. For a stock, this can simply be determined by comparing a firm to its key rivals, or at least those rivals that operate similar businesses. Differences in the value between similar firms could present opportunity


A discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

A discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment






Key Takeaways:

  • The Process of Valuation helps an Investor to find a true value of a company’s business, buy the stocks which are undervalued and sell those which are overvalued.
  • Value of Money will decrease over time and as investors we need to put our money to work by investing in Asset class like Equity which will give higher returns over time.

Next Course of action:

  • Visit Research Reports and get to know the rationale behind great ideas for you to make sound long term investment decisions.
  • A thorough analysis of company, industry and economy goes behind our stock ideas for you. With these picks, you may earn superior returns over a medium to long term period.
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