What Is Valuation?
An estimate of what a company or asset is actually worth, compared to its market price.
The Full Definition
Valuation is the process of estimating what a company is actually worth, independent of its current stock price, using metrics like the P/E ratio, free cash flow, and growth expectations. A stock can be a great company and still be a bad investment if you overpay — valuation is what separates those two questions. Common approaches include comparing a company's multiples to its own history, its industry peers, and the broader market.
Real-World Example
Two companies might both grow earnings 15% per year, but if one trades at a P/E of 20 and the other at 50, the second requires far more growth (or far more optimism) already priced in to be a good investment from today's price.