Assessing the viability of a business.

Stock market cap is what you would have to pay to acquire the business but it is inherently unreliable as a guide to value because it is reflective of uncommercial factors such as sentiment. The grossest recent example of this was the dotcom bubble, in which robust companies' shares collapsed while dotcoms' prices rocketed despite the fact that they didn't make any money and never would. The reasons for this, and how it unwound, are complex, but it make it clear that stock market cap reflects price rather than value.

You don't consider only one possible outcome either; you look at everything that may affect value and form a view based on what you think will happen. Other valuation methodologies do not lend themselves to this as well. Thus NPV is the most reliable in that you can at least consider what you think will happen rather than either shrug or guess.

In your example you wouldn't value the business at a mix of X or Y because that creates a third valuation which unlike the other two is unsupported by any conceivable outcome. You'd go for X or Y and assign a probability to their happening; and you'd then consider what the implications are for the business - it may be that the deal is either still good or still bad.

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That's all a valuation is!

wrote

I never suggested it would.

However, if you put a ballpoint pen on eBay [with a reserve of a million pounds, so it likely won't reach reserve - but you wouldn't mind even if it did ;-) ], and the highest bid was, say 6 -- then 6 would be a market valuation of the ballpoint pen.

Or do you disagree with that too?

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Agreed - but market cap is a **much more reliable** guide to 'what you'd pay to acquire the business', than NPV is a guide to the true value.

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I'd say that makes it more *sophisticated*, but *not* more reliable.

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... or good only on one of the outcomes, and bad on the other.

That doesn't help you put a *reliable* value on the business. [Ie a value that can be "relied upon", one that can be "trusted or believed".]

No, a valuation is a calculation based on worth. An auction reserve is just a number.

The #6 would indeed be a market valuation, which takes us back to ow the market decides what the item is worth - and that has nothing to do with the reserve.

You still need to know the value by some means or other in order to know whether the market cap is a fair price or not. Price does not guarantee value, nor does it necessarily even approximate it, as those mugs who bought dotcom stock have discovered.

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I know. And what someone will pay for an item, *is* a measure of its worth.

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Which is why I didn't suggest that the reserve was a valuation. It's the 'final bid' that I suggested was a valuation.

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Exactly. And it doesn't appear on your list of four from which you said "There are no other known ways".

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That's why I didn't suggest that it did!

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True, but all off the point.

The question was whether an amount is a *reliable* estimate for a quantity. The market cap *is* a quite reliable estimate for the cost of the shares (it can be relied upon, believed & trusted). A NPV is less *reliable*, because it cannot be relied upon to be as close to the true value which it is trying to estimate, as a market cap can be relied upon to be close to the cost of shares.

Um, no, here's what you said:-

'Put a large enough reserve on the sale, and it turns into a (market) valuation!'

It does, because previous sale prices simply form data points in a comparable transaction analysis. If you maintain that an auction price is a valuation, it is only relevant to the value of something you are interested in if the auction was of something comparable...meaning that auction prices simply provide a comparable transaction analysis.

An auction is a sale method, not a valuation method. Those who bid into them have relied on one or more of the four valuation methods to determine the level of their own bid in the first place.

Ergo, it represents the output from one of those, not a fifth means of doing a valuation.

In an eBay auction, the valuation method is typically either comparable transactions (what have ballpoint pens previously sold for, and what therefore must I expect to pay?) or asset replacement (what would I have to pay for this ballpoint pen elsewhere?).

The question is about *value*, not price, however. A dotcom whose price is #1 a share may actually be only worth #0.01 when its actual cashflows are considered. This is the level to which many dotcoms fell overnight after the crash; take out the hype and the nonsense, and what are they *really* worth? Er, they're worth whatever profit they can generate, which in most cases was none at all.

Their genuine underlying value didn't really change, just their market cap. If you think that market cap is an infallible guide to value rather than just to price, then your investment decisions become easy; you can just buy any shares at all, in any quantity, randomly. It doesn't matter what the company is or what it does. As long as you're paying based on market cap, you're paying what they're worth. Right?

Well, clearly not. Analysts who argue that shares are undervalued usually do so because they have a take on NPV that suggests as much.