Stock valuation is a critical component of the investment process. It allows investors to make more informed decisions by determining the true worth of an asset. If you don’t know the value of something, it’s challenging to understand if you’re overpaying or getting a good deal.
Valuing a business can be a complex process that involves a variety of methods. We will go through each of the methods to value a stock and provide a comprehensive approach to valuing a business. Stock valuation is the practice of placing a theoretical value on a business, known as intrinsic value.
You must value the business in order to value the stock.
Charlie Munger
Valuing a business gives investors insights into whether the business is overvalued, undervalued, or fairly priced. While understanding how to value a business using the various methods is important, investors must recognise that these are estimates. Even minor changes to the inputs can lead to widely different valuations. Therefore, it’s essential to understand all the inputs and how they impact the outcome before using them.
Analysts can become fanatical about forecasting and modelling procedures. However, as Stoic Investors, we must ensure we determine value across different lenses and not solely based on the numbers. Let’s dive in and by the end of this section you will have the knowledge to start valuing investment opportunities.
The Basics of Valuation…
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β¬οΈ Downloadable Resources:
Discounted Cash Flow (DCF) Model Template
You can download and use a copy of my Discounted Cash Flow Model (DCF) below. It is not a very detailed one, however, gives me the information I need. It includes 3 Sensitivity checks as well.
Reverse DCF Model Template
You can also download a copy of my Reverse DCF Model below. I use this the most. It helps me to evaluate opportunities efficiently by looking at what growth has been priced in by the market.