Significance

Equity valuations are conducted to measure the value of a company given its current assets and position in the market. These data points are valuable for shareholders and prospective investors who want to find out if the company is performing well, and what to expect with their stocks or investments in the near future. Equity-valuation formulas include the Dividend Discount Model, the Dividend Growth Model and the Price-Earnings Ratio.

Features

The total equity of a company is the sum of both tangible assets and intangible qualities. Tangible assets include working capital, cash, inventory and shareholder equity. Intangible qualities, or intangible assets, may include brand potential, trademarks and stock valuations. Performance indicators include the price/earnings ratio, dividend yield, and the Earnings Before Interest, Depreciation and Amortization (EBIDA). The valuation may also take the firm’s enterprise value (EV) into account; this is calculated by combining the net debt per share with the price per share.

Benefits

A thorough analysis of tangible and intangible assets allows prospective investors, shareholders and financial managers of a company to obtain critical performance data about the company’s business operations. The equity valuation method takes several types of data into account, and can be used as part of a prediction model to determine the economic future of the company. The valuation also provides some indication of the level of risk involved in investing in the company.

Considerations

Resources

More Like This

What Are Intangible Assets in Accounting?

How to Calculate Net Tangible Assets

Importance of a Retained Earnings Statement

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