Valuation (Financial)
Introduction
In finance, valuation or asset valuation is the process of estimating the value of an asset (accounting) (for example, stocks, options, businesses, or intangible assets such as patents and trademarks) or a liability (for example, a company's debt securities). The valuation process is very important in many situations including investment analysis, capital budgeting, Mergers and Acquisitions, etc.[1].
It is important to note that valuation is both an art and a science because it requires the judgment of the professional involved.
These professionals can be from multiple disciplines but must be accredited by the regulatory institutions of the related field or market. This means that they know the national standards and are authorized to make these value judgments.
Generally, several valuation methods are used in different scenarios, obtaining different valuations of the target asset depending on the method used and the scenario chosen. In this way, it can be seen that the valuation methods are not mutually exclusive, but rather the use of more than one of them allows analysts to offer an opinion that takes into account different points of view.
It is also important to realize how important it is for the functioning of the economy to correctly determine the value of assets. For example, if a company with a great future that can transform a sector of the economy is not adequately valued and when it sells its shares in the market it receives only a small amount of financing, then said transformation will not occur. Likewise, if a mediocre company achieves a high valuation that gives it large amounts of investor funds, these resources will be wasted. That is, in other words, asset values are market signals that result from the allocation of shareholder resources and in turn serve to allocate other resources in the future.
[2] For this same reason it is important to design the regulation of financial markets so that this valuation adheres to the essential value of the assets regardless of the vagaries of financial intermediaries and trying to avoid price manipulation by different agents.[3].
Valuation of financial assets
The valuation of financial assets is done using one or more of these methods or models:.