Business valuation is an analytical process and a set of methods used to estimate the current value of the present equity of an owner of a company. This is normally done by rating companies on different financial measures, most often over the last three years. The valuation of a company is used by potential investors to decide whether to make an investment in the company. The financial rating is derived from the results of the various processes that involve assessing credit ratings, liquidity ratings and other aspects of company finances. Many financial market participants use valuation in order to determine the value of shares in a company.
For an investor, the valuation of a company is usually done by looking at its financial records, and the overall health of the business. A company’s cash flow, its capital structure, its debt, and the extent to which it will be able to finance its growth are all taken into consideration. When the market value of a company is determined, all of these aspects will be weighted equally by the total expected profits that would be produced by the business. This gives the investor an idea of what it would take for the business to realize its profit.
The cash flows associated with each business also play a vital role in determining the market value. All of the above factors are applied in order to give an accurate picture of the current value of the company. To give a better understanding of how this works, consider a restaurant in which the manager anticipates a great sales year because of the success of a special menu. If, however, the business has poor cash flows and they have just started offering a new menu, the manager may overestimate the earnings of the business and the stock price may fall.