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Understanding Valuation Methodology of the Financial Markets

In: Investor Relations and ESG Reporting in a Regulatory Perspective

Author

Listed:
  • Poul Lykkesfeldt
  • Laurits Louis Kjaergaard

Abstract

As the company seeks to diversify its investor base, it is essential to realise the different approaches applied by the investors. In this chapter, we outline how established investors either assume efficient markets to be weak or to be semi-strong. The semi-strong oriented investor sees some share as priced correctly and others incorrectly relative to them. The investor considering weak efficient markets attempts to find fundamentally mispriced shares. The first can be defined as “top-down” and the latter as “bottom-up” investors. The company also dictates the method, as a bottom-up valuation method of discounting future cash flows (DCF) to today requires stable and positive future cash flows to arrive at a realistic estimate. This is mainly relevant for so-called value companies, whereas growth companies focus on growing their top-line and market share penetration, with less focus on earnings and cash flow.

Suggested Citation

  • Poul Lykkesfeldt & Laurits Louis Kjaergaard, 2022. "Understanding Valuation Methodology of the Financial Markets," Springer Books, in: Investor Relations and ESG Reporting in a Regulatory Perspective, chapter 0, pages 25-28, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-05800-4_4
    DOI: 10.1007/978-3-031-05800-4_4
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