Equity Valuation: Science, Art, or Craft?

by Frank J. Fabozzi, Sergio M. Focardi, Caroline Jonas

The price at which a stock is traded in the market reflects the ability of the firm to generate cash flow and the risks associated with generating the expected future cash flows. The authors point to the limits of widely used valuation techniques. The most important of these limits is the inability to forecast cash flows and to determine the appropriate discount rate. Another important limit is the inability to determine absolute value. Widely used valuation techniques such as market multiples - the price-to-earnings ratio, firm value multiples or a use of multiple ratios, for example - capture only relative value, that is, the value of a firm's stocks related to the value of comparable firms (assuming that comparable firms can be identified). The study underlines additional problems when it comes to valuing IPOs and private Both are sensitive to the timing of the offer, suffer from information asymmetry, and are more subject to behavioral elements than is the case for shares of listed firms. In the case of IPOs in particular, the authors discuss how communication strategies and media hype play an important role in the IPO valuation/pricing process.

138 pages, Kindle Edition

Published January 9, 2018

About the author

Frank J. Fabozzi is a Professor in the Practice of Finance and Becton Fellow in the Yale School of Management. He is well known as the author of numerous books on finance, both practitioner-focused and academic. Professor Frank J. Fabozzi will be joining Edhec Risk Institute on August 1, 2011. EDHEC-Risk Institute is part of EDHEC Business School, one of Europe’s leading business schools.

Reviews

[Maks Stam · Rating 4 out of 5]

This book is helpful if you are already familiar with equity analysis and have some practical experience. It will not teach you how to analyse companies or pick the best stocks. Rather it gives an overview of the state of fundamental equity analysis in the modern world of finance and how it faces new challenges in the light of rising passive investments, big data, machine learning and so on. The book also touches on the underlying economic components of equity valuation.

In my view, this work will be most helpful for equity analysts looking to broaden their understanding of the profession and will provoke some thinking about it...