Question

How do professional analysts value assets. Why do they use these measures?

Answer 1

Professional analysts value assets using different methods like:-

1.Net asset value method :-The net asset value is also known as Net Tangible Asset method. It is the book value of tangible assets on the balance sheet less intangible assets and libilities or the money that would be left if the company were to be liquidated.A stock will be considered undervalued if its market value were below book value,which means the stock is trading at a deep discount to book value per share and it will demand an investment.

2.Discounted dividend models:-It values a stock's price by discounting predicted dividends to the present value.If the value is higher than the current trading price of shares,then the stock is undervalued and it demands an investment.

3.Discounted free cash flow models:-It calculate the present value of future free cash flow projections. It is also discounted by the weighted average cost of capital.It reflects the overall capital cash flows which is netted and discounted at present.

4.Residual Income Valuation Models:- It consider all the cash flows that accrue to the firm after the payment of diffrent parties like suppliers and others.The value of the company is the sum of book value and the present value of expected future residual income.

They use these valuation measures in order to find the true value of the company and based upon that value, Analysts find out whether the stock is overvalued or undervalued.They furthur make positions on basis of such valuations.