Equity Valuation Services: Process, Features, and Methods Involved

Enterslice provides equity valuation services to both small-scale and large-scale businesses. We recognize the in-depth industry and financial familiarity that goes into evaluating a property or business. Our team of experts is qualified to supervise a variety of equity valuation paradigms. We do more than just analyze your assets and revenue statistics. Our processes authorize investors with the knowledge to evaluate a company’s intrinsic value, make educated investment decisions, and steer the unpredictable courses of the stock market. Whether you’re a beginner or an experienced investor, understanding the influence of fundamental analysis is key to attaining your financial desires in the world of equities. Enterslice’s equity valuation professionals calculate all forms of tangible and intangible variables to come up with the exact worth of a company at any given point.

Overview of Equity Valuation Services

Equity Valuation is a cardinal process for investors looking to make well-thought-out decisions in the stock market. It entails determining the intrinsic or fundamental value of a company’s stake to evaluate whether they are undervalued, overvalued, or fairly priced. It is a course of accessing the value of a company’s stock by scrutinizing its financial declarations, operational presentation, future business trends, and economic circumstances. The goal is to establish the fair market value of a stock, which can be associated with the current market price, to make conversant investment adoptions. This is an intricate but vital process for investors looking forward to building an efficacious portfolio. Fundamental analysis directed by an equity valuation service provider like Enterslice serves as the foundation of this procedure.

Importance of Equity Valuation

Stock Market

The whole arrangement of the stock market is built on the idea and facts of equity valuation. The stock markets have a wide variability of stocks on the proposal, whose perceived market value differs every minute.

Financial Structure

Equity Valuation is the mainstay of the modern financial structure. Consequently, the crafts and services of equity valuation enable the modern economic system to allocate scarce capital resources competently between various market contributors.

Stock Value

The market obtains information every instant and makes an effort to factor the financial effect of these statistics on the stock value. Therefore, there can be a variance between the market worth of a company and what investors call its true or ‘intrinsic value’.

Services Offered for Equity Valuation

Various services offered by Enterslice for equity valuation service are listed below-

Financial statement analysis

Our equity valuation expert will thoroughly examine a company’s financial statement, including the income statement, balance sheet, and cash flow statements. They evaluate key financial metrics such as revenue growth, profitability, and liquidity to enumerate the business’s financial well-being.

Industry and Market Research

To recognize a company’s competitive situation, Enterslice’s valuation experts will organize an in-depth examination of the industry and market in which the company functions. They analyze industry inclinations, competitive undercurrents, and market situations that may affect the business’s performance.

Valuation Models

Experts in these service areas use countless models to evaluate the intrinsic value of a stock. Common valuation models include the discounted cash flow (DCF) model, comparable company analysis (CCA), and price-to-earnings (P/E) ratio analysis.

Risk Assessment

Our valuation expert will evaluate the risks related to investing in a specific stock. They consider aspects like regulatory risks, market volatility, and geopolitical events to deliver a comprehensive risk outline for investors.

Fundamental Analysis

It is the core procedure used by equity valuers to assess stocks. It emphasizes the underlying operational and financial attributes that drive a company’s function.

Tax computation

Our valuation experts will also support the course of tax computation because it also impacts the valuation analysis process. It helps in understanding and predicting the revenue generated.

Compliance needs

It’s important to make sure that all the processes involved in equity valuation are legal. Our valuation experts will make sure they handle all the compliance needs during the process.

What is Intrinsic Value?

Definition

Intrinsic value is a quantity of what an asset is worth. This attribute is arrived at by an objective computation or complex financial structure. Intrinsic value is dissimilar from the prevailing market price of a commodity or an asset. However, paralleling it to the current price can give stakeholders an idea of whether the asset is underestimated or overvalued. Financial analysis processes use cash flow to establish a business or stock's intrinsic or fundamental value. The options pricing method deals with intrinsic value, that is, the variance between the option's strike cost and the fundamental asset's current market price.

Calculation

There is no universal norm for calculating the intrinsic value of a business or stock. Many financial analysts strive to determine an asset’s intrinsic worth by using technical and fundamental analyses to obtain its actual financial enactment. While they may shape valuation models using qualitative, measurable, and perceptual business aspects, the measure often used in computation for intrinsic value is discounted cash flows. Typically, investors try to utilize both qualitative and measurable factors to count the intrinsic value of a company, but investors must keep in mind that the outcome is still only an approximation.

Qualitative factors

Qualitative factors, such as business structure, governance, and target markets, are objectives specific to what the company does. Quantitative factors denote financial well-being and include financial proportions and financial declaration analysis. Perceptual aspects refer to investors’ insights into the relative value of an asset. They’re mainly accounted for by the calculations of technical analysis. Generally, intrinsic worth can be measured to be how much the company is worth, as established by selling off the entire business and its possessions.

Market Risk and Importance of Intrinsic Value

A market risk attribute is also calculated in many valuation models for stocks, the risk is calculated by beta. A beta is an approximation of how much the stock value or its instability could vary. A beta of a stock is considered unbiased or connected with the general market. A beta bigger than one means a stock has an amplified risk of instability, while a beta of less than one evaluates that it has a lesser risk than the general market. If a stock has a greater beta, there should be a larger return from the cash flows to pay compensation for the augmented risks, which is paralleled to an investment with a small beta. Intrinsic value is a significant measurement for investors to use so that they can identify when stocks are underestimated or trading beneath their true value. This usually indicates a beneficial investment opening. After all, the whole point of investing is to grow a person’s wealth. Recognizing the concept of intrinsic worth and the dissimilar methods you can use to compute it can help you make well-informed investment choices.

Methods for Equity Valuation

There are a number of different ways to perform equity valuation. The most popular methods include the following-

Comparable Approach

A company’s equity worth should bear some likeness to other equities in a parallel class. This entails equating a company’s equity to contenders in the market or other companies in the same segment. The goal of utilizing the comparable company analysis method is to hunt for other public companies that share features with the private firm. These characteristics comprise industry, geographies in operation, revenue size, margins, and age. For a recognized business, this process is way easier. For example, SaaS businesses will have lots of similar companies because the market has become tremendously saturated in the last ten years.

Most SaaS businesses that originated during the previous few years are still loss-making, have high revenue progression, and contain a high net retention rate that compensates stakeholders for the poor bottom line. In this scenario, for a PE/VC business thinking about a buyout, the worth lies in assessing a discount in the company compared to other publicly traded companies. To measure the discount, stakeholders often calculate industry medians of dissimilar valuation multiples. The metrics can be traditional ones such as EV/Revenue, EV/EBITDA, and free cash flow/share, or industry-specific measures such as customer acquisition cost (CAC), churn rate, lifetime value, and annual recurring revenue (ARR).

Discounted Cash Flow

A business’s equity value is determined by the future cash stream projections using net present value. This approach is most valuable if the company has robust data to support future working forecasts. Private companies’ accounting declarations may also include private/individual expenses along with business expenditures in the case of minor family-owned businesses and have unaccounted gaps across the panel. However, suppose the purchasing firm is able to determine precise numbers for revenue and functioning costs, taxes, and working principle factually. In that case, they model these statistics out to a 5-10-year timeframe and then regulate the free cash stream. Since the free cash stream is illustrative of how much cash the business has accessible to give back to stockholders, it is reflected as an accurate count of a company’s fair value. The discount rate problem stated above also affects the calculation of the company’s beta, which is the degree of volatility related to investing in the firm as divergent to the global equities market.

Precedent Transactions

A company’s equity relies on chronological values for completed M&A transactions linking similar companies. This method is only applicable if similar entities have recently been valued and/or sold. Suppose a private business is trading at lower multiples to other public contenders while anticipating higher or equal income growth. In that case, it becomes a stimulating investment when a comparable or precedent transaction method comes into actuality. If their market timing and execution approaches are right, a PE/VC firm can come in, buy this business, and make revenue through an IPO once the scheme’s timeline is complete. If the target company operates in a domain with lots of recent notable dealings or IPOs, we can use statistics from those transactions to compute valuation. What splits the world’s finest private investors and aids them in delivering extraordinary value to LPs constantly is that they factor in everything when valuing a company, any possible one-time events affecting assessment, worth of management, and arrangement of the acquirer/ acquiree’s goals, and lastly, whether the private company will be able to provide a high profit on invested capital. In unstable equities markets like today, venture capitalists and LPs may want to pursue liquidity in their stock interests, so they need an advanced rate to validate the investment. This is perhaps a reason why the volume of PE/VC funding has reduced in the last year; markets are indefinite about future forecasts and are only seeking investments with either firm belief or minimal disadvantage. 

Asset-based Valuation

The equity value of a company is determined based on the fair market value of net assets possessed by the company. This method is most frequently used for entities with a going concern, as this method highlights outstanding liabilities, establishing net asset value. It is also utilized for considering the worth of assets and liabilities of a commercial. In this method, the value of a company is equal to the difference between the value of all its relevant assets and the value of all its relevant liabilities. The benefit PE/VC (private equity/ venture capital) firms grip over investing in public markets in the timing. There is a prospect to make enormous gains if these companies can time their entrance into public markets during a period of doubt and low estimates and exit into the public markets once optimistic market sentiment has come back. Classically, industry averages can be utilized for computations with a slight premium glued to account for higher rates of equity and debt.

Book-Value Approach

The cost of the company's prior acquisition serves as the basis for calculating equity value. This approach is only applicable to businesses that have seen slow development and may have just completed an acquisition. Since book value provides a realistic and precise view of a company's worth, it is seen as significant in the context of valuation. The figure is not usually subjective; rather, it is established based on past corporate statistics. It indicates that market experts and investors have a fair understanding of the company's value. For investors who utilize a value investing technique, book value is mainly significant because it can help them locate great stock offers, particularly if they believe the stock will increase in value because the firm is either inexpensive or has room to grow.   Because it is thought that stocks that are trading below book value will eventually rise in value, they are frequently regarded as deals. Investors who can purchase the stocks at a discount to the book value of the company will have a great chance of making a sizable profit and positioning themselves for future trading success.  

The sum of the Parts Valuation Method

A conglomerate with a variety of business ventures might require an alternative valuation methodology. This approach involves valuing each firm independently and adding the results to the equity valuations. We refer to this valuation technique as the sum of parts valuation method. PE/VC firms employ industry averages to analyze beta, and depending on the type of beta used, they either unlevel or level that number and change it based on the target's credit history. The fact that valuation is an art rather than a science is frequently helpful, and this is particularly true when making investments in private markets. Our estimations and assumptions, along with our faith in the target company's accounting procedures, are the only foundations around which our computations are built.

Risk-Adjusted NPV

The most popular technique for pricing chemicals or products in sectors like biotech and pharmaceuticals is risk-adjusted net present value (NPV). Similar concepts are used in the risk-adjusted net present value (NPV) private equity valuation approach as in the DCF equity valuation method; the difference is that each future cash flow is adjusted for risk based on the likelihood that it will really occur. The success rate is another name for the likelihood that the cash flow will occur. By analyzing the likelihood that a certain molecule or drug would successfully complete the several development phases typically included in the drug development process, one may determine the success rate of that particular product or drug.

How is Intrinsic Value Calculated

Using DCF (Discounted cash flow) analysis, cash flows are assessed based on how a company may execute processes in the future. Then, those cash flows are discounted to today’s worth to gain the business’s intrinsic value. The discounted rate is generally a risk-free rate of revenue. It can also be the business’s weighted average cost of capital (WACC).

The formula to calculate the Intrinsic Value –

DCF= CF1/ (1+r) ^1 + CF2/ (1+r) ^2+ ------+ TV/ (1+r) ^n, where CF = the probable cash flow for a precise period (e.g., CF1 = cash flow year one), R = the discount rate, TV = the terminal worth, and N = the specific period (e.g., years, quarters, months, etc.)

Understanding Fundamental Analysis Services

Fundamental Analysis (FA) evaluates a security’s or equity’s intrinsic worth by inspecting related economic and financial influences. Intrinsic value is the worth of an asset based on the issuing business’s financial standings and present market and economic circumstances. Fundamental analysts study everything that can influence the security’s value, from macroeconomic features like the efficiency of the company’s administration. The final objective is to establish a number that an investor can equate with a security’s current worth. Normally, analysts study for the following reasons: The general state of the economy, the potential of a particular industry, and the financial well-being of the company providing the stock.

Need to Calculate the Intrinsic Value

Stocks

An instance of intrinsic value in investing is the assessment of stocks. Investors can use various approaches to compute the intrinsic value of a stock, counting discounted cash flow analysis, price-to-earnings ratios, and price-to-book ratios. If a stock’s intrinsic value is greater than its market value, it can be a good investment prospect, while if its intrinsic worth is lower than its market value, it could be overestimated and not worth investing in.

Bonds

Intrinsic value is also utilized in the valuation of bonds. The intrinsic value of a bond denotes the current value of its future cash currents, which are the coupon payments and the primary payment at the prime. The current value of the cash streams is computed using the bond’s return to maturity, which is the rate of return that investors need for investing in the bond. If a bond’s intrinsic value is greater than its market value, it may be a good investment opening, but if its intrinsic value is lesser than its market value, it may be overestimated and not worth investing in.

Real Estate

The intrinsic value of a property signifies the present value of its future cash streams, which are the rental revenue and resale worth. The present value of the cash streams is calculated using the property’s total working income or net operating income (NOI) and also a capitalization rate (cap rate), which is the rate of profit that investors require for investing in the property. If a property’s intrinsic value is greater than its market value, it may be a good investment prospect, while if its intrinsic worth is lesser than its market value, it may be overestimated and not worth investing in.

Process of Equity Valuation

Make Financial Projections

In order to carry forward the procedure of equity valuation precisely, firstly, the valuation advisor will estimate the future financial performance. The calculation needs to be done with some statistics that exist in the financial model of the company; they are projected income streams, expenses, costs, and investments for the approaching years. All of this will be collected to a prognosis of the financial declaration and the KPI (key performance indicators) of the company.

Estimate Future Free Cash Flow

The future cash streams can be seen as the company's financial accomplishments in the future. This will be used to establish the company’s value now. In this step, our valuation advisors will apply a free cash stream as they are constantly corrected as investments are made to keep the business running in the diminutive term. This also means that it is always prepared and represents everything precisely. Free cash flows after the initial period= Free cash flow for the last projected * (1+ growth factor)

Determine Discount Factor

For this process, our valuation experts will calculate the Weighted Average Cost of Capital (WACC). The greater the percentage, the greater the risk, which in turn indicates a low valuation of the business and vice versa. With the WACC value, our valuation experts will now be able to calculate the discount fact. The formula to calculate the discount factor is- Discount factor = 1/ (1+ WACC percentage) ^Time period.

Secondary Steps of Equity Valuation

Calculate WACC

WACC= (Market value of company equity/ (the sum of the market value of the company equity and company debt))* Cost of Equity + (market value of the company debt/ (the sum of the market value of the company equity and company debt))* Cost of Debt*(1- Corporate Tax Rate)

Calculate Terminal Value

Alongside computing the net present worth of a certain future date, our valuation specialists will also calculate the value of the produced cash flows after the early period, which is called the ‘Terminal value’. Terminal Value = Free cash flows after the initial period/ (WACC-growth rate)

Aggregate Calculations

The valuation advisor will then add the net present value of all the cash flows, and after doing so, you will get the probable worth of your business. 

Analysis and Creation

To approve and decrease uncertainty, our valuation advisors will create more situations, changing the amounts of assets or liabilities dependent on the situation. Then, analyze it to understand the best and worst situations.

Importance of Fundamental Analysis

Informed Decision Making

This offers investors a wide-ranging understanding of a company’s financial well-being, which is vital for making informed investment choices.

Risk Mitigation

By evaluating a company’s financial steadiness and industry undercurrents, fundamental analysis helps investors recognize and alleviate risks associated with a specific stock.

Long Term Perspective

A long-term perspective analysis is predominantly valuable for long-term investors. It allows them to pay attention to a company’s rudiments rather than short-term market variations.

Valuation Consistency

It provides a reliable and rational tactic for valuing stocks, reducing the probability of overvaluing or undervaluing securities.

Process of Fundamental Analysis

Fundamental analysts meticulously review a company’s financial statements. They analyze revenue growth, profit margins, and cash flow to assess the company’s financial strength and stability. Current ratios like the debt-to-equity ratio are also examined to gauge the company’s liquidity and control position. Investigating the quality of earnings is crucial. Fundamental analysts look for sustainable earnings and assess whether core operations or one-time events drive earnings growth. Comprehending a company’s competitive standing is vital. Analysts evaluate factors such as market share, barriers to entry, and product differentiation in the industry. It calculates the capability and reliability of a company’s management team. Corporate governance tactics are also inspected to guarantee transparency along with ethical behaviour and ascendency. Analysts contemplate the wider economic ecosystem and industry-related factors that may influence the company’s performance. This includes assessing market trends, competitive forces, and regulatory changes. Fundamental analysts use valuation methods like DCF, P/E, and CCA to calculate the intrinsic value of stakes. These methods take into interpretation future cash flows, market comparables, and earnings potential.

Advantages of Hiring Enterslice’s Expert Equity Valuation Services

There are numerous methods of equity valuation, and each technique values an equity stock in a dissimilar way. A valuation analyst will use several methods as per the information he wants to analyze and get a holistic opinion of the info. When a valuation expert does equity valuation, by different methods to calculate the value of the stock, you get the fair market value of that particular stock. The fair market value may be beyond or lower than the actual market worth. Valuation experts also help recognize the risk areas of the business. These may comprise questions such as whether the debt is too big or whether liquidity is too small, etc. Comparative analysis makes it easy for them to associate stocks within the sector and industry.