Company valuation models are programs used by investors to determine the value of a company they are considering as a potential investment. By approximating the value of a company in the present time and projecting it into the future, an investor can determine if the investment is worthwhile. Most company valuation models include computer spreadsheets which require data entry of pertinent financial information. From this information, the programs are usually set up to perform mathematical calculations which arrive at key determinations about different aspects of a business.
Business valuation is an important part of the process for investors who operate at the highest levels of the financial world. These are the kind of investors who go beyond just buying common stock. They may buy enough stock to have some sort of decision-making authority for the business, or they might be part of a venture capital or private equity group that looks to struggling businesses as investment opportunities. For investors like these, company valuation models are important tools of the trade, since they streamline the valuation process.
In most cases, company valuation models are set up on computer spreadsheets. The spreadsheets, which may differ from model to model, generally contain spaces so that financial information about the company can be entered. This financial information is usually gleaned from income reports and balance sheets of the target businesses. These documents will provide all of the necessary information about a company's assets, liabilities, revenue, and expenses.
Basic information from income reports and balance sheets is often supplemented in company valuation models by even more detailed measurements of financial strength. Some of these measurements, such as discounted cash flow or weighted average cost of capital, are somewhat complex. But the program included in the model will usually do all of the work and handle all necessary computations. The finished product reveals a value of the company in terms of how much its shares of equity are worth, which is the ultimate goal of business valuation.
One other way that company valuation models can provide useful information on the overall strength of a business is through the use of financial ratios. These ratios take two pieces of financial information and divide one into another. The resulting numbers can be used to measure many crucial aspects of a business, such as its efficiency, its exposure to debt, its cash flow, and much more. Comparing these ratios to other similar businesses is an excellent way to judge the value of the company in question.