[PlanB Admin]

Greetings everyone,

It is important to realize that there is no quick fix for accurate valuations.

We all would be lounging in the Bahamas if it were the case.

Here are some restrictions that you will run into as you move through the course and make decisions.

The Dilemma in Selecting a Valuation Method

There are multiple methods of valuing equity, and each method has a different perspective.

It sometimes becomes difficult for an analyst to determine which method is suitable.

It gets even more difficult if each method results in a different value, and analysts must decide which value to follow. For example, a growing start-up may not have a good equity value as per the book value method because it is financially unstable, but it might have a very good equity value as per discounted cash flow method because it is in the high growth stage and might have very good future cash flows.

The question is, which valuation to consider? Which value is more reliable? This is a matter of subjective judgment of the analysts & investors.

Valuation Ignores Intangible Assets

None of the equity valuation methods consider intangible assets of the company, such as brand loyalty, customer retention, and ownership of intangible assets.

These assets are invaluable to any company, and the value of these assets will increase in the future.

By not considering these assets, we ignore an important asset class of a company. This results in flawed equity valuation & wrong investment decisions.

Errors in Assumption

When valuing a company’s equity, analysts make many assumptions, such as whether the company will reinvest its earnings or the company will have X amount of cash flow each year.

But these assumptions may be wrong.

The company may not re-invest its income or may not earn the estimated cash flow.

Even if such simple assumptions go wrong, it can affect the value of its equity and lead to wrong decisions.

Thus before using equity valuation methods to analyze stocks, it is important to consider all its benefits and drawbacks to make informed investment decisions.

Keep learning!

[Author]

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