Valuation

An estimate of what an asset is worth, as distinct from the price it currently trades at. Built from what the asset produces plus judgements about growth, duration and required return.

Example

A business earning 1,000,000 a year, on multiples of 8 to 14 times, is worth somewhere between 8,000,000 and 14,000,000.

Important

The honest output is a band, not a figure. A single number is an answer to an easier question - what figure would make the decision feel settled.

Related terms

  • Intrinsic value — What an asset is worth on the basis of what it will produce for its owner, independent of what anyone is currently willing to pay for it.
  • Margin of safety — The gap between what you pay and the value you believe an asset has - deliberate room for the estimate to be wrong.
  • Sensitivity analysis — Recomputing a valuation with each uncertain input moved across the range you would defend, to see how much the answer depends on each one.

Lessons that explain it

  • The same company can be a good investment at one price and a bad one at another — An investment decision weighs the range of outcomes against the price paid. Scenario-based expected value shows how quickly a higher price erodes the return from the same company. (11 min)
  • No closing bell: comparables, appraisal and the cap rate — Nothing quotes this asset. Its price comes from three negotiated sales that happened months ago, adjusted by somebody's judgement - and from an income lens that is more honest and much less popular. (11 min)
  • The scorecard method starts from what similar deals were priced at — The scorecard method takes the typical pre-money valuation of comparable early-stage deals in a region and adjusts it up or down by comparing the company on weighted factors. (10 min)
  • The Berkus method prices progress that reduces risk — The Berkus method assigns a value to each of five risk-reducing milestones a pre-revenue company has reached, with a fixed maximum for each, and adds them up. (9 min)
  • Risk factor summation adjusts a price for twelve named risks — The risk factor summation method starts from a benchmark valuation and moves it up or down in fixed steps for each of twelve categories of risk, making every adjustment explicit. (10 min)
  • Several methods give a range; the gaps show what you believe — No single method values an early company reliably. Running several and comparing the results shows the range of defensible prices and exposes which assumptions drive the difference. (10 min)

All 578 terms in the Investing glossary