What is a valuation?
Definition: Valuation is an analytical process of estimating an asset or business's overall worth and real market value.
Valuation is done by the company itself or the potential buyer using objective measures such as a review of the company’s cash flow and comparison with other companies in the same industry.
Other factors considered during valuation are market trends, historical data, current economic conditions, scarcity, and potential for future growth or decline.
The purpose of a valuation can be for financial reporting, taxation, estate planning, risk management, or facilitating a sale or acquisition.
The result of a valuation is usually presented in a report or statement, and is used to guide decision-making and transactions involving the asset in question.
Valuation example and formula
Here is an example of a valuation of a SaaS company using the enterprise method to EBITDA multiple. The enterprise method is one of the most accurate measures of a company valuation because it includes non-stable capital structures.
By dividing the enterprise value by EBITDA, we can get an accurate picture of the company’s value and determine if it’s undervalued or overvalued.
EV/EBITDA= Market Capitalization + Debt+ Preferred shares - Cash/EBITDA
EV= enterprise value
EBITDA = earnings before interest, taxes,depriciation, and amortization