<p>Valuation is the process of estimating the economic worth of an asset, security, or entire company. Analysts examine financial statements, market conditions, and future prospects to arrive at a figure that reflects intrinsic value. This figure guides buying, selling, and strategic decisions.</p>

<h2>How It Works</h2>
<p>Valuation relies on three main approaches, each suited to different contexts.</p>
<ul>
<li><strong>Income approach</strong> discounts expected future cash flows to present value using a required rate of return.</strong></li>
<li><strong>Market approach</strong> compares the subject to similar publicly traded companies or recent transactions, applying multiples such as the <a href="/NewSite/encyclopedia/pe-ratio/" class="ency-link">P/E ratio</a>.</strong></li>
<li><strong>Asset-based approach</strong> sums the fair market value of individual assets and subtracts liabilities to derive net asset value.</strong></li>
</ul>
<p>Analysts often blend methods, adjusting for growth assumptions, risk factors, and industry specifics to refine the estimate.</strong></p>

<h2>Why It Matters</h2>
<p>A reliable valuation underpins sound financial decisions across the investment lifecycle.</strong></p>
<ul>
<li>Investors use it to identify undervalued or overvalued securities, shaping buy or sell signals.</strong></li>
<li>Corporate managers rely on valuation for mergers, acquisitions, capital budgeting, and performance tracking.</strong></li>
<li>Regulators and tax authorities require valuations for compliance, reporting, and dispute resolution.</strong></li>
</ul>
<p>For example, a private equity firm evaluating a target company will build a discounted cash flow model, compare results to peer multiples, and adjust for synergies before deciding on an offer price.</strong></p>