Why is company growth so important in valuation analysis? What difficulties does this bring to valuation...

Why is company growth so important in valuation analysis? What difficulties does this bring to valuation analysis?

Expert Solution

Company's growth is very important in valuation analysis because valuation in regards to the company is done in order to invest into the company for the longer time frame and growth for a company means that growth is associated with regards to the futuristic performance of the company so when any financial analyst is doing valuation for the company, he is looking for growth prospect of the company in order to invest in the long-term into the company so that he can maximize his capital through capital appreciation and he can also maximize its capital through dividend payments which would be highly encouraged by the profits of the company.

Growth rate is to be assigned by various analyst while performing valuation of the company like in price to earnings growth ratio, is a highly preferred method for valuation of futuristic performance of the company and decisions are made accordingly because a growth rate is assigned to the earnings per share along with comparison with the market share of the company and then it is to be compared with the intrinsic value of the share, and if the value is finding there is a difference between the market value and the current intrinsic value of the share, then he wants to capitalise on that difference and wants to invest into the company assigning a growth rate so that he can maximize his overall rate of return.

Projection of growth is highly difficult in nature because it is not dependent upon past performance of the company and there is no accurate tool for prediction of the future of the company. so, growth rate can never be assigned precisely and it will have to be highly flexible in nature according to the changing environment so that valuation can be very flexible and it can adapt to the changing fundamentals of the company.

So it can be said that assignment of a growth rate is a highly complex task and it is not easy to project a future growth rate of the company and there are no precise method for calculation of a growth rate for the company so it would had to be forecasted very accurately and after analysis of a longer time frame because any mis-projection can cause erosion of capital and getting into a bad investment

jeff jeffy answered 1 year ago

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