Usage
In finance, valuation analysis is required for many reasons including tax assessment, wills and estates, divorce settlements, business analysis, and basic bookkeeping and accounting. Since the value of things fluctuates over time, valuations are as of a specific date e.g., the end of the accounting quarter or year. They may alternatively be mark-to-market estimates of the current value of assets or liabilities as of this minute or this day for the purposes of managing portfolios and associated financial risk (for example, within large financial firms including investment banks and stockbrokers).
Some balance sheet items are much easier to value than others. Publicly traded stocks and bonds have prices that are quoted frequently and readily available. Other assets are harder to value. For instance, private firms that have no frequently quoted price. Additionally, financial instruments that have prices that are partly dependent on theoretical models of one kind or another are difficult to value. For example, options are generally valued using the Black–Scholes model while the liabilities of life assurance firms are valued using the theory of present value. Intangible business assets, like goodwill and intellectual property, are open to a wide range of value interpretations.
It is possible and conventional for financial professionals to make their own estimates of the valuations of assets or liabilities that they are interested in. Their calculations are of various kinds including analyses of companies that focus on price-to-book, price-to-earnings, price-to-cash-flow and present value calculations, and analyses of bonds that focus on credit ratings, assessments of default risk, risk premia and levels of real interest rates. All of these approaches may be thought of as creating estimates of value that compete for credibility with the prevailing share or bond prices, where applicable, and may or may not result in buying or selling by market participants. Where the valuation is for the purpose of a merger or acquisition the respective businesses make available further detailed financial information, usually on the completion of a non-disclosure agreement.
It is important to note that valuation is part art and science because it requires judgment and assumptions:
- There are different circumstances and purposes to value an asset (e.g. distressed firm, tax purposes, mergers & acquisitions, financial reporting). Such differences can lead to different valuation methods or different interpretations of the method results.
- All valuation models and methods have limitations (e.g., degree of complexity, relevance of observations, mathematical form).
- Model inputs can vary significantly because of necessary judgment and differing assumptions.
Users of valuations benefit when key information, assumptions, and limitations are disclosed to them. Then they can weigh the degree of reliability of the result and make their decision.
Read more about this topic: Valuation (finance)
Famous quotes containing the word usage:
“I am using it [the word ‘perceive’] here in such a way that to say of an object that it is perceived does not entail saying that it exists in any sense at all. And this is a perfectly correct and familiar usage of the word.”
—A.J. (Alfred Jules)
“Girls who put out are tramps. Girls who don’t are ladies. This is, however, a rather archaic usage of the word. Should one of you boys happen upon a girl who doesn’t put out, do not jump to the conclusion that you have found a lady. What you have probably found is a lesbian.”
—Fran Lebowitz (b. 1951)
“...Often the accurate answer to a usage question begins, “It depends.” And what it depends on most often is where you are, who you are, who your listeners or readers are, and what your purpose in speaking or writing is.”
—Kenneth G. Wilson (b. 1923)