Value Investing Learning about valuation and wanting to cross-check my current understanding

---

Learning about valuation and wanting to cross-check my current understanding Posted: 24 Nov 2018 05:53 AM PST New investor here and as the title suggest, I would like to cross-check some of the knowledge I recently acquired to identify gaps as I move forward learning about security analysis. My understanding is that when it comes to valuation there are 2 main approaches: Intrinsic and Relative valuation. Intrinsic Valuation The value of the asset is estimated by its cash flow, growth and risk. The EIL5 version is that the asset value is relative to how well we project the company will do in the future. This requires a few assumptions like ROE, Growth Rate and FCF. DCF is the common approach to find a stock's intrinsic value to which there are many variations: DDM, FCFE and FCFF. Relative Valuation The value of the asset is estimated relative to its peers group market value. The EIL5 version would be to compare it to paying for a house. One would pay for a house after scouting what the next door houses sell for and adjust price expectations accordingly. The same applies for stocks. To do relative valuation we need a standardized price to be used to compare assets since the market value of the stock is in some ways a function of the number of outstanding shares. So to normalize the price for comparison, it is divided by some value that directly relates to the company valuation such as earnings for example (i.e: a multiple). The reason to use company valuation is because relative valuation assumes that assets within the same peer group shares similar cash flows, growth and risks. Some examples of relative valuations are: P/E, P/B, EV/EBIT etc. Those can be used to compare assets directly within the same peer group or compare the multiple of the asset against the multiple of the entire peer group average. That being said, since not every company is made equal such a company can have a higher growth than the average expected growth of its peer, we need another multiple to account for growth differences which otherwise would make companies with unusual high growth have high price to earnings compared to the average. One way to do this is the PEG ratio which is basically taking the PE divided by the expected growth. The ELI5 version is that such as we normalize the market value relative to valuation criteria, we account for growth difference by normalizing the multiples to the growth to have an adjusted metric for comparison across a set of assets. ​ Did I capture this correctly or could you point to me where my assumptions have gaps? Thanks! submitted by /u/crosmaxal [link] [comments]

You are subscribed to email updates from Value Investing. To stop receiving these emails, you may unsubscribe now.	Email delivery powered by Google
Google, 1600 Amphitheatre Parkway, Mountain View, CA 94043, United States