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Chapter 9 — COMPANY VALUATION
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COMPANY VALUATION

COMPANY VALUATION

There are many factors that are important for company valuation - determine whether a company is a valuable asset to invest in. When finding stocks it is important to consider individual interests, risk tolerance, and goals, but there are also 5 key factors for the company valuation to understand which companies are good investments.

company valuation

PRODUCTS

Looking at what a company provides as its core business is a great place to start when examining company valuationProducts sold directly to consumers are called business-to-consumer sales (B2C). An example of B2C is your local grocery store selling product to its patrons. You'll want to find companies that offer products and services that not only have strong marketability but also have a strong position in consumer markets. Companies providing products that everyone needs, such as food, energy, and housing, are often much sounder investments than companies that serve a very limited part of society. Some companies also provide their products and services primarily to other businesses. These are called business-to-business sales (B2B), while products sold to consumers are called business-to-consumer sales (B2C). Most products sold directly to consumers, such as computers, can also be sold to businesses, but not many B2B products are sold to consumers. B2B products are generally the “in-between” parts of the finished products. For example, the companies that make the glass for mobile phones are selling the glass to the phone manufacturers, but the finished product (the phone) is eventually being sold to a consumer.

COMPETITIVE ADVANTAGES

A company can have a very strong product, but without a competitive advantage, that product will quickly become obsolete and it’s a positive point for the company valuation. A competitive advantage is what makes a specific company better than its competitors. This can come in the form of the product(s) that they provide, as well as the company’s marketing, promotion, packaging, and service divisions. For a company to be successful and to have a good company valuation, and therefore a profitable long-term investment, it must have a competitive advantage.

ASSETS

Assets is an important part of your company valuation, which is basically the balance sheet. The balance sheet outlines a company’s current assets and liabilities, comparing what the company owns (assets) and what it owes (liabilities). Investing in a company that owes much more than it owns (when there are more liabilities than assets) is often unwise. These companies are financially unstable, so the company valuation is usually negative, and can easily run into financial trouble. Investing in a company with a strong financial standing is important, especially for long-term investment strategies.

INNOVATION

Innovation is also important for company valuation. Depending on your trading strategy, market leaders can be an extremely lucrative group of companies to invest in. These companies are the innovators of their product markets and bring new ideas and new products into consumer markets. When these companies introduce new product ideas they can experience huge stock gains as investors become excited about the company’s future. Apple is a great example of an innovative market leader, and the introduction of new Apple products can have huge effects on technology markets and Apple’s stock price.

MARKET STAGE

Products go through a cycle of stages, which is also influencing company valuation. Product ideas are introduced, developed, mature, and decline. While many companies can provide substantial dividends and returns to the stockowners throughout every stage, the stage of its main product offering is important to consider for a few main reasons:

1. First, a product idea at an early stage often has a higher risk/reward ratio. Because the product is new, there are few competitors in the market to compete for market share. But on the other hand, these ideas are often untested in consumer markets and may fail.

2. Inversely, products in the later stages, such as market maturity and market decline, have very limited potential for future growth. However, a company with products in later stages can still differentiate itself from competitors and still provide sustained profits and returns to investors.

Alex's thoughts: 
The value of a stock should not be confused with the current price of the company. The value of a company can be measured in a lot of ways and a good investor knows when a company's price is lower than its actual value.

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