Importance of Valuation

Why Company Valuation is a Critical Step in your Investment Process

It’s easy to find good listed businesses; the ASX is full of them. The challenge is buying them at the right time. And I’m not talking about trying to time the market – that is a fool’s game. But buying these excellent companies when their valuation is favourable is the key to good investing.

There are two main methods we use at Farnam to value a business: by building a discounted cash flow (DCF) and using a price to earnings (PE) multiple. A detailed explanation of each is beyond the scope of this article, but briefly, a DCF values the business based on future expected earnings discounted to the net present value, and the PE takes the current multiple the stock trades on and compares it to a group of industry peers.