Valuation is an important concept for those who work in the financial sector. It should be learned through financial management courses, which must be based on theory but have a strong practical application.
After all, one has little or no value without the other. Teaching the concept without showing how it should be applied only adds value to those who work in academia.
On the other hand, business schools do not produce robots that memorize and apply formulas — students need to understand what they are doing. They want to graduate as analysts, professionals capable of applying the knowledge they acquire to practical problems in their daily lives.
To better explain the importance of this concept for companies taiwan whatsapp data and their formation, in this post we will explain in more detail what it means and how it can be applied in everyday life. Stay tuned!
What is valuation?
This is the exercise of assigning economic value to assets or companies. It is a complex practice, probably one of the most difficult when we talk about corporate finance.
Mastering this “art” is not simple. It requires a lot of study and effort. It is necessary to get your hands dirty and actually put the idea into practice, discuss it and defend it.
The best place to start adopting this concept is at business school, a safe environment that allows you to act in an exploratory manner. This way, you can make mistakes and learn from the situation.
However, this exercise must continue in both professional and personal life. From then on, there will be greater consequences, since mistakes are no longer allowed.
How to apply valuation?
There are two methods of assigning value and applying this concept. The first and most common is based on benchmarking, or comparison. The second — and more accurate — is based on value generation (or cash flow).
This concept is applied daily by people in everyday situations, such as when evaluating how much an asset is worth, comparing prices , terms and conditions, and estimating how much return one will get when investing in a certain asset.
However, when it comes to adopting this concept for a company, it is necessary to be more systematic. After all, the sums and consequences have much greater dimensions. See below how to apply each of the methods mentioned:
Benchmark based
It is applied by comparing the value of two types of companies. You can look at companies listed on stock exchanges — such as Bovespa —, whose reference is the price of their shares multiplied by the number of securities, or the market price (market cap). This is the methodology based on market multiples, or trading comps.
It is also possible to analyze the most recent companies purchased by other organizations, because this generates a price reference. This is the methodology based on multiples of previous transactions, or transaction comps. It is important to mention that the benchmark method is usually an advisory methodology.
Based on value generation
It is the most common method of evaluating a company, because it considers the cash generation that the enterprise provides. It is based on discounted cash flow, or discounted cash flow (DCF).
There are at least four variations of the method :
cash flow for firm;
cash flow to the shareholder;
dividend flow;
leverage buyout analysis.
This last variation is less important in Brazil. Even so, it is essential to understand each of them, their differences, when to apply each methodology and what their limitations are.
If the most common method is based on discounted cash flow , it is necessary to discuss how to produce it. How to make projections based on historical information, develop scenarios and ensure the consistency of your business plan are issues that need to be worked on in a valuation course.
If the projected cash flow — which is the raw material for the DCF model — is not well-prepared, the result will not be accurate, even if the analyst masters all the valuation techniques.
What should be covered in a valuation course?
A good course teaches the fundamentals and explains the theory, but also shows how they should be applied. It should be comprehensive and discuss the fundamental prerequisites for practice, such as analyzing financial statements and building a business plan.