{"id":8100,"date":"2023-06-14T14:27:04","date_gmt":"2023-06-14T08:57:04","guid":{"rendered":"https:\/\/razorpay.com\/learn\/?p=8100"},"modified":"2024-08-16T19:20:21","modified_gmt":"2024-08-16T13:50:21","slug":"valuation","status":"publish","type":"post","link":"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/","title":{"rendered":"What is Valuation?"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69f250408c831\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69f250408c831\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#What-is-Valuation\" >What is Valuation?\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Understanding-Valuation\" >Understanding Valuation<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Fair-Value\" >Fair Value<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Intrinsic-Value\" >Intrinsic Value<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Types-of-Valuation-Models\" >Types of Valuation Models<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Relative-Valuation-Model\" >Relative Valuation Model\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Absolute-Valuation-Model\" >Absolute Valuation Model\u00a0<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#What-are-the-Types-of-Valuation-Methods\" >What are the Types of Valuation Methods?\u00a0<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Comparable-Method\" >Comparable Method<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Precedent-Transaction-Method\" >Precedent Transaction Method<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Discounted-Cash-Flow-Method\" >Discounted Cash Flow Method\u00a0\u00a0<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Example-of-Valuation\" >Example of Valuation<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#Effect-of-Earnings-on-Valuation\" >Effect of Earnings on Valuation\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#What-is-the-Purpose-of-Valuation\" >What is the Purpose of Valuation?\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/valuation\/#FAQs\" >FAQs<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What-is-Valuation\"><\/span><b>What is Valuation?\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Valuation is the process of calculating the current, or projected worth of assets of a company. There are many different ways and techniques of calculating the valuation of a company, depending on the reason for valuation.\u00a0<\/span><\/p>\n<p>An analyst takes several factors into consideration when calculating the value of a company &#8211; the market value, capital structure, future projections, management structure and more.<\/p>\n<p><span style=\"font-weight: 400;\">The value of a company can be calculated for many reasons. The most common reason is sale of assets or sale of the business itself. In times of divestiture or sale, it is important to know if the business or its assets are overvalued or undervalued so the management can get the best price possible.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Understanding-Valuation\"><\/span>Understanding Valuation<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Fundamentally, valuation is determined by comparing what the buyer is willing to pay and what the seller is willing to accept. There are two kinds of value that can be calculated for an asset:<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Fair-Value\"><\/span>Fair Value<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>This is the value of an asset that is mutually agreed upon by both buyer and seller. It is measured by taking into consideration the market value of the asset, its growth potential and projected future performance.<\/p>\n<p>It may not be the true value of the asset, because the perception of the buyer and seller and overall <a href=\"https:\/\/razorpay.com\/learn\/market-demand-and-its-value-for-entrepreneurs\/\">market demand<\/a> play an important role in determining the fair value of an asset.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Intrinsic-Value\"><\/span>Intrinsic Value<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The intrinsic value is the true, actual value of an asset independent of its market value. The goal is to determine the value that the asset should have based on its fundamentals.<\/p>\n<p>If the intrinsic value is higher than the market price, the asset may be considered undervalued and potentially a good investment opportunity.<\/p>\n<p>Analysts use valuation models to find out whether the asset is overvalued or undervalued and help the buyer get the best price possible.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Types-of-Valuation-Models\"><\/span><b>Types of Valuation Models<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li aria-level=\"1\">\n<h3><span class=\"ez-toc-section\" id=\"Relative-Valuation-Model\"><\/span><b>Relative Valuation Model\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">In relative valuation models, analysts compare the company&#8217;s net worth with other companies of similar niches. It is assessed based on the ratios like earnings-per-share or price-to-earnings multiples.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Earning-per-share (EPS) is calculated based on the number of earnings of shareholders of shares divided by the number of outstanding shares in a market. In contrast, price-to-earning is assessed by market value per share divided by the earning-per-share.\u00a0<\/span><\/p>\n<ul>\n<li aria-level=\"1\">\n<h3><span class=\"ez-toc-section\" id=\"Absolute-Valuation-Model\"><\/span><b>Absolute Valuation Model\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">In absolute valuation models, analysts try to find the true or intrinsic value of a company following market fundamentals. It means looking at the company&#8217;s cash flow, dividends payment and growth graph. This model does not require any comparison with other companies. Further, it follows different types of absolute valuation models for a complete assessment. This includes discounted cash flow model, asset-based model, dividend discount model, etc.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When compared, assessment of a company&#8217;s worth using the relative valuation model is easier than the absolute valuation model. For example, if the price-to-earning of a company is less as compared to that of other companies, a former company&#8217;s shares appear to be undervalued.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What-are-the-Types-of-Valuation-Methods\"><\/span><b>What are the Types of Valuation Methods?\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li aria-level=\"1\">\n<h3><span class=\"ez-toc-section\" id=\"Comparable-Method\"><\/span><b>Comparable Method<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">In this method, analysts compare a company&#8217;s metrics with other companies of similar industry and size. It considers the past transactions of similar companies to estimate appropriate value. For example, in asset-based valuation methods, analysts add all market value of assets, to get the intrinsic value of a company and compare the same with other businesses.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, depending on a company&#8217;s niche and mode of operation, different models are suitable for different companies. For instance, it is inappropriate to use an asset-based model for a company that has not acquired sufficient assets. For them, it is more feasible to follow an earning-based approach.<\/span><\/p>\n<ul>\n<li aria-level=\"1\">\n<h3><span class=\"ez-toc-section\" id=\"Precedent-Transaction-Method\"><\/span><b>Precedent Transaction Method<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The precedent transaction method is a process where analysts assess a company against other similar companies sold recently. Generally, this valuation method is necessary during a merger or acquisition with another company.\u00a0<\/span><\/p>\n<ul>\n<li aria-level=\"1\">\n<h3><span class=\"ez-toc-section\" id=\"Discounted-Cash-Flow-Method\"><\/span><b>Discounted Cash Flow Method\u00a0\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">In this process, analysts determine investment or asset value based on cash inflows and outflows generated by these factors. While calculating, these cash flows are discounted with a rate based on their current value. It indicates an assumption of interest rates or rates of return made by investors.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s understand it with an example. When a company purchases machinery or plants for its new factory, there will be a cash outflow. Now this cash outflow will be assessed by the cash inflow generated by this asset. These cash flows are discounted to the current value to determine the net present value of a business.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Example-of-Valuation\"><\/span><b>Example of Valuation<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>One way a company&#8217;s valuation is calculated is the market capitalisation, or its market cap. A company&#8217;s market cap is calculated by multiplying each share price with the total number of shares outstanding in a market.<\/p>\n<p><span style=\"font-weight: 400;\">For instance, if the value of a company share is Rs. 50, and there are 1,00,000 shares outstanding in the open market, then its market capitalisation is Rs. 50,00,000.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Effect-of-Earnings-on-Valuation\"><\/span><b>Effect of Earnings on Valuation\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">EPS acts as a profit indicator. It means the greater the value of earnings from shares, the more valuable will be the company&#8217;s shares. In addition to this, analysts also use price-to-earning (P\/E) for stock valuation. This ratio determines the level of the stock price concerning the earnings generated by each share.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It&#8217;s important to note that valuation methods can vary depending on a company&#8217;s industry, stage of development, and specific circumstances. Valuing a company is a complex task that often requires a combination of quantitative analysis, qualitative factors, and market conditions.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What-is-the-Purpose-of-Valuation\"><\/span><b>What is the Purpose of Valuation?\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The general purpose of a valuation is to calculate the worth of a company. This approach allows buyers to understand a company&#8217;s prospects and how much worth is an asset in comparison to its current market price. Thus, sellers can estimate the selling price of the assets.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Valuation is pivotal when there is a scenario of merger and acquisition or in case of winding up. In addition to this, a company may undergo a valuation during<\/span> <span style=\"font-weight: 400;\">capital financing or security investment.\u00a0<\/span><\/p>\n<p><b>Contribution of RazorpayX to Seamless Corporate Operations\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">RazorpayX, a premium banking suite offers a myriad of features that makes modern-day banking and book-keeping seamless and time-saving. With automation mode catering to evolving banking needs, this business banking platform assists business owners with impeccable money management. For instance, access to <\/span><a href=\"https:\/\/razorpay.com\/x\/current-accounts\/\"><span style=\"font-weight: 400;\">current accounts<\/span><\/a><span style=\"font-weight: 400;\"> powered by RazorpayX helps with keeping track of day-to-day cash inflows and outflows.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In addition, services like <\/span><a href=\"https:\/\/razorpay.com\/x\/vendor-payments\/\"><span style=\"font-weight: 400;\">vendor payments<\/span><\/a><span style=\"font-weight: 400;\"> initiated by RazorpayX free businesses from the hassle of handling invoices manually. With the help of this tool, companies can capture invoices automatically which eventually increases their financial standing and builds market goodwill.<\/span><\/p>\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/current-accounts\/?r=blog_cta_business_banking_types_valuation&amp;utm_source=blog&amp;utm_medium=cta\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Check out RazorpayX!<\/a><\/div>\n<p>&nbsp;<\/p>\n<p><strong>Read more:<\/strong><\/p>\n<p><a href=\"https:\/\/razorpay.com\/learn\/business-banking\/current-account-opening-documents-required\/\"><span style=\"font-weight: 400;\">Current Account Documents<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/blog\/business-banking\/what-is-current-account\/\"><span style=\"font-weight: 400;\">What is Current Account<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-a-business-account-for-startups\/\"><span style=\"font-weight: 400;\">Business Account<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/learn\/business-banking\/mab-monthly-average-balance-current-account\/\"><span style=\"font-weight: 400;\">Monthly Average Balance<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/blog\/business-banking\/zero-balance-current-account-business\/\"><span style=\"font-weight: 400;\">Zero Balance Current Account<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-current-accounts\/\"><span style=\"font-weight: 400;\">Types of Current Account<\/span><\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\t\t\t<div id=\"rank-math-rich-snippet-wrapper\" class=\"\">\n\n\t\t\t\t\n\t\t\t<\/div>\n\t\t\n","protected":false},"excerpt":{"rendered":"<p>What is Valuation?\u00a0 Valuation is the process of calculating the current, or projected worth of assets of a company. There are many different ways and techniques of calculating the valuation of a company, depending on the reason for valuation.\u00a0 An analyst takes several factors into consideration when calculating the value of a company &#8211; the<\/p>\n","protected":false},"author":151156542,"featured_media":8101,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3437],"tags":[3664],"class_list":{"0":"post-8100","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-banking","8":"tag-valuation"},"_links":{"self":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8100","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/users\/151156542"}],"replies":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/comments?post=8100"}],"version-history":[{"count":3,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8100\/revisions"}],"predecessor-version":[{"id":12611,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8100\/revisions\/12611"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media\/8101"}],"wp:attachment":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media?parent=8100"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/categories?post=8100"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/tags?post=8100"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}