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Definition: Valuation Analysis
Valuation Analysis is a form of fundamental analysis which looks to compare the valuation of a security, to a group of securities or otherwise within their own historical context. It is done for evaluating the potential benefits of an investment or to assess the value of an asset or business objectively.
Valuation analysis is one of the most basic duty of a fundamental investor, as the valuation (with the cash flows) is basically the most crucial driver of prices of assets over the long duration.
Every Valuation analysis must answer the simple, yet critical, question of, "What is a thing worth?" Then the analysis is based upon current projections or future projections. Although investors can agree on the current P/E ratio (price-to-earnings ratio), but interpreting a provided valuation can vary and would differ among these same investors.
Different types of valuation methods can be used, for equities, the most famous valuation metric used is the P/E ratio, although other valuation metrics include: Price/Book Value, Price/Sales, Price/Earnings, Discounted Cash Flow, Enterprise Value/EBIDTA, and Economic Value Added .
The interpretation of a given valuation can and shall differ among the same investors