What are the methods of valuation?
How to value a business? There are 2 ways to estimate.
1 Absolute Valuation Method
It is a pricing model used to calculate the intrinsic value of a business.
For example, you can base on the company's cash flow in the past N years. Use this to predict the cash flow situation in the next N years. All cash flow data can be found in the annual report. Finally, discount according to the predicted data, that is, calculate how much the price in the next 5-10 years will be converted to today, to judge whether the current stock price is expensive or cheap. Whether it is expensive or cheap will determine whether I buy it or not.
Because if a company is more valuable, its stock price will be more expensive, but this is not absolute. For investors, we just want to find that the company's value is very good. But the company's stock price is not so high. This is the key to making money. Make money on the difference between the value of the company itself and its value in the market. This is what Buffett calls "value investing." But there is a very important indicator in the absolute valuation method called the discount rate. The discount rate can be understood as the percentage corresponding to the conversion of future money into current money. The discount rate depends on your judgment on the market, and it is the result of combining supervisory and objective factors.
The value setting of the discount rate is different, which will lead to the difference in the final calculation of the enterprise value.
This discount rate directly affects the value of the enterprise. What else does corporate value have to do with it?
Divide the estimated enterprise value by the number of shares to get the estimated value per share. The estimated value per share and the current market value per share in the market can guide our decision-making for stock selection. The more the estimated value is relative to the market value, the more worth buying.
Compared with the absolute valuation method, it is judged by the discount rate, and the judgment is more subjective. It is difficult for us to use such a model to make accurate judgments. Therefore, the method we commonly use in the market is called "relative valuation method".
2 Relative Valuation Method
Relative valuation methods mainly include these indicators, PE price-earnings ratio, PB price-to-book ratio, and PS price-to-sales ratio.
Why is it called relative valuation, because the level of the above indicators depends on other companies in the same industry. It is calculated by comparison.
| calculation method | meaning | official | Statistical methods |
|---|---|---|---|
| PE price-earnings ratio | The rate of return on market value can be understood as: according to the current level of income, how many years it will take to recover the cost, which is related to the growth rate of profit | Price (market value)/Earnings (net profit) | Static price-earnings ratio (net profit at the end of the previous year), dynamic price-earnings ratio (net profit for the next year), rolling price-earnings ratio (net profit for the last four quarters) |
| PB price-to-sales ratio | The ratio of market capitalization to main revenue, to examine the stability and reliability of revenue | Price (market value)/Book Value (main revenue) | Price-to-sales ratio (main business income, total main business income in the last four quarters) |
| PS P/B Ratio | Ratio of market value to net assets, mainly tangible assets, often underestimated (intangible assets, fixed asset appreciation, receivable issues) | Price (market capitalization)/Sales (net assets) | Price-to-book ratio (total equity attributable to shareholders of the parent company, at the end of the reporting period) |
The rolling price-earnings ratio is the most commonly used, which is the addition of the total net profit of the past 4 quarters. So relatively speaking, it is the most accurate data.