The process an entity/ investor (or broadly any market player) follows in order to establish how the market values a business or an investment, an asset or a collection of assets, etc. This involves an arsenal of tools and techniques including quantitative models, financial ratios, formulas, analytical capabilities, management’s judgments, etc., all aiming to determine market value (MV), taking into consideration the broader market conditions and developments.
For example, the market valuation of an entity’s tangible and intangible assets depends to a great extent on its actual performance and the market’s and investors’ expectations of its future ability to produce economic benefits from these assets and/ or their value growth. A higher market valuation is a recipe for accessing less costly and/ or better financing opportunities.
For market valuation to be an effective means for establishing market value, a comprehensive approach should be followed, with a focus on various key factors that drive such a valuation (for companies), including, among others:
- Growth in revenue (using weighted forecasts);
- Growth in profit margin (using weighted forecasts);
- Dynamics of a company’s debt-to-equity ratio;
- Patterns of cash (monetary dividends) paid or returned to shareholders;
- The economic conditions in the broader industry;
- Market volatility (specifically in the relevant markets and market set-ups where a company and its rivals compete).
