Usually, there are 5 stages to equity valuation.
1) Understanding the business. This includes understanding the competitive industry the firm is inane company financial performance.
2) Forecast company performance, based on the financials as in part 1. There are 2 types of forecast. First is top-down, which looks at the macro-economic situation and forecast, industry forecast and finally company and asset forecast. The second is bottom-up, which is based on company financials.
3) Selection of appropriate valuation model. As mentioned in an earlier post, there are multiple ways to value companies. In general, valuation methods are split into absolute and relative valuation. Absolute valuation looks at the estimated intrinsic value of the stock itself, and relative valuation looks at the estimated value relative to that of other stocks/assets.
4) Convert forecast into valuation. Analyse the results of your valuation by using sensitivity analysis and situational adjustments.
5) Apply valuation conclusions based on the purpose of the valuation.
