Understanding the Four Key Valuation Methods 

four key valuation methods
July 11th, 2024 0 Comments

An essential aspect of investment portfolio valuation is understanding the value of the companies where your funds are concentrated. The appraisal of investments, businesses, and properties forms the foundation of any portfolio valuation report. Familiarizing yourself with the four key valuation methods can significantly enhance this process, providing a structured approach to assess value accurately. It is important to perform these valuations regularly as market dynamics shift and the fortunes of individual companies fluctuate, experiencing both setbacks and successes.  

So, how can you determine the worth of these investments and businesses? An expert in wealth management like Saddock Wealth will gladly provide routine investment portfolio valuation services that will take the burden of continual assessments off your shoulders.  

Our financial advisors use multiple considerations and ensuing in-depth calculations. We also have an expert eye to ensure that a portfolio valuation report is as accurate as possible, with clear-cut guidance on what to do next. 

In the meantime, – there are four common valuation methods that financial experts utilize to determine the value of these companies and commodities. Let’s explore these four methods in more detail.  

What are the Four Valuation Methods? 

Though the exact terms for the four most common valuation methods can somewhat vary, these four evaluation methods are comparable company analysis, precedent transactions, discounted cash flow analysis (DCF), and asset-based valuation. 

Comparable Company Analysis 

Comparable company analysis (also sometimes referred to as “trading comps”) compares the current value of a company to other similar businesses by looking at trading multiples. This relative valuation method then assigns a value to a company based on what its counterparts and similar organizations are currently worth.  

A comparable company analysis is one of the most common valuation approaches. However, it can have challenges, as not every company – especially large, publicly traded companies – has solid and nearly identical comparisons to examine. Considering these critical differences between varying companies will go a long way in ensuring a comparable company analysis is accurate.  

Precedent Transactions 

Precedent transactions analysis is similar to comparable company analysis. However, it primarily examines companies that have been sold or acquired within the same industry.  

These types of analysis are helpful for mergers and acquisitions, but timing is a key component when it comes to accuracy. The length of time since the transaction occurred may affect the accuracy of the current data based on the current market and a flood of other factors.  

Discounted Cash Flow Analysis (DCF) 

Discounted cash flow analysis examines the intrinsic value of a business. The analysis determines a company’s unleveraged free cash flow in the future as well as discounts it back to the current moment, and its weighted cost of capital.  

This analysis requires a lot of foundational expertise and is easily one of the most detailed valuation approaches. It also requires a lot of estimates and assumptions or predictions about the future, which is why it’s a valuation method that is best suited for professional wealth managers. However, the results – when the analysis is performed with an expert eye – can be extremely accurate and helpful going forward.  

Asset-based valuation 

An asset-based valuation is another intrinsic form of analysis that centers on a focused accounting of a company’s total net asset value versus its total net liability value.  

Though a large chunk of this analysis is straightforward, considering an organization’s profits, real estate, other real property, and other measurable assets, it can quickly become more challenging when the value of less tangible aspects like branding, trademarks, and copyrights come into play.  

Like many other complex analyses on the list, this type of analysis requires the ability to make educated estimates. Therefore, it may be best to leave this kind of analysis to a wealth management expert who can properly account for your assets.  

Partner with our Experts for the Most Precise Data and Analysis for Your Portfolio

The ideal portfolio valuation report won’t rely on a single method of calculation. Instead, it will consider a combination of these four standard valuation methods to paint a complete and clear picture of what an investment portfolio is truly worth. 

In addition, and more importantly, an expert wealth manager will use this data to create clear strategies for moving forward, allowing an investment portfolio to naturally grow while minimizing risks and vulnerabilities across the board. 

Connect with the financial experts at Saddock Wealth today to garner a clear calculation of where your investment portfolio stands and the steps you can take to make it grow. With an expert behind the scenes looking out for your best financial interests, you’ll have an inherent head start on reaching all your future financial ambitions and goals.   

Contact us today!  

Financial Planning, Portfolio Construction and Diversification