Valuation

Valuation is assessing what an asset or company is currently worth. It builds the basis for judging whether a share price is cheap or expensive.

There are two broad approaches. Relative valuation compares similar companies using multiples such as P/E and P/B. Absolute valuation discounts future cash flows to arrive at a figure.

Relative valuation is quick and intuitive but fools you when the whole comparison set is overpriced. Absolute valuation is logical but swings widely with its assumptions. So both are used together.

A share that looks cheap is not automatically an opportunity. A low P/E usually has a reason — a declining industry, deteriorating earnings, or regulatory risk.

Valuation is a tool for generating questions rather than answers. Its real use is forcing you to ask why the price is what it is, and revealing what the market is assuming. The appropriate multiple also differs depending on whether a company is growing or mature. Comparing it against its own historical average is a good starting point.