Question

A Valuation Is Not The Valuation. Elaborate

Answer 1

‘A Valuation is not The Valuation’. This statement cannot be more accurate and captures the essence of valuation in finance.

We can say that valuation is a technique that helps in determining the worth of a company or the worth of an asset. It is essentially a quantitative process of finding out the fair value of a firm.

In this context we can say that a valuation is not The Valuation because of the fact that valuation only gives us the fair value but not the intrinsic value. Consider the methods of absolute valuation and relative valuation. In case of absolute valuation the true value of an asset is determined using the fundamentals only related to the asset. In case of relative valuation the multiples of one company is compared to the multiples of another company.

When using one method over the other we have to discard the benefits of the other valuation method that is being used. As such a valuation method is never perfect and can never said to be completely objective. Some level of subjectivity and bias (no matter how small) will always be present in valuation. Due to this one cannot always say with certainty that a valuation will lead to true intrinsic value. The intrinsic value that we get from valuation does have some bias error element to it. Hence the statement ‘A Valuation is not The Valuation’ aptly applies in finance.