what is valuation 
valuation is the analytical process of determining the current or projected worth of an asset or company many techniques are used for doing a valuation among other metrics an analyst placing a value on a company looks at the business s management the composition of its capital structure the prospect of future earnings and the market value of its assets fundamental analysis is often employed in valuation although several other methods may be employed such as the capital asset pricing model capm or the dividend discount model ddm investopedia mira norianunderstanding valuationa valuation can be useful when you re trying to determine the fair value of a security determined by what a buyer is willing to pay a seller assuming that both parties enter the transaction willingly buyers and sellers determine the market value of a stock or bond when a security trades on an exchange the concept of intrinsic value refers to the perceived value of a security based on future earnings or some other company attribute it s unrelated to the market price of a security and this is where valuation comes into play analysts do a valuation to determine whether a company or asset is overvalued or undervalued by the market types of valuation modelsthe original company might be considered undervalued if the p e is lower than the p e multiple of a comparable company the relative valuation model is typically a lot easier and quicker to calculate than the absolute valuation model this is why many investors and analysts begin their analysis with this model types of valuation methodsyou can do a valuation in various ways the comparable company analysis looks at companies that are in size and industry and how they trade to determine a fair value for a company or asset the past transaction method looks at past transactions of similar companies to determine an appropriate value there s also the asset based valuation method which adds up all the company s asset values to get the intrinsic value assuming that they were sold at fair market value a comparables approach is often synonymous with relative valuation in investments sometimes doing all these and then weighing each is appropriate to calculate intrinsic value but some methods are more appropriate for certain industries you wouldn t use an asset based valuation approach to valuing a consulting company that has few assets an earnings based approach like the dcf would be more appropriate analysts also place a value on an asset or investment using the cash inflows and outflows generated by the asset this is called a discounted cash flow dcf analysis these cash flows are discounted into a current value using a discount rate which is an assumption about interest rates or a minimum rate of return assumed by the investor dcf approaches to valuation are used in pricing stocks such as with dividend discount models like the gordon growth model the firm analyzes the cash outflow for the purchase and the additional cash inflows generated by the new asset if a company is buying a piece of machinery all the cash flows are discounted to a present value and the business determines the net present value npv the company should invest and buy the asset if the npv is a positive number the precedent transaction method compares the company being valued to other similar companies that have recently been sold the comparison works best if the companies are in the same industry the precedent transaction method is often employed in mergers and acquisition transactions 