This guide is here to uncover the stock valuation definition and tap into the different methods associated with it – read on for valuable insights!
What Is Stock Valuation?
Stock valuation is the technique of determining the intrinsic value of a stock, or its true worth, at a given period. The ultimate goal of this process is to understand whether the stock’s intrinsic value matches its market price or if it is currently under- or overvalued to make informed investment decisions.
What You Need To Know About Stock Valuation
There are two primary methods of conducting stock valuation:
- Absolute stock valuation. It is a method that determines the intrinsic value of a stock by examining its financial and economic fundamentals. It involves analyzing the company’s cash flows, revenue, earnings, growth potential, and other financial metrics to gain market insights.
- Relative stock valuation. It is a means of comparing a stock to similar offers in the same industry or market. It involves analyzing multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-book (P/B) ratios, among others.
Each of these approaches has its own set of advantages and drawbacks.
The main advantage of absolute valuation is that it provides a means of getting a more accurate picture of a company stock’s true worth, independent of market trends or conditions. However, it can be time-consuming and requires a deep understanding of financial statements and accounting principles.
On the other hand, relative valuation is a quicker and easier method that allows for a broader comparison of multiple companies or stocks. Yet, it is heavily reliant on market trends and may not account for differences in fundamentals or economic conditions.
Note that an investor can also use a combination of both methods to arrive at a more comprehensive and accurate valuation of a company or its stock. This approach is known as a hybrid stock valuation model.
