A business can be valued by capitalizing its earnings stream. how might you use
ID: 2666555 • Letter: A
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A business can be valued by capitalizing its earnings stream. how might you use the same idea to value securities, especially the stock of large publicly held companies? is there a way to calculate a value which could be compared to the stock's market price that could be compared to the stock market price that would tell an investor whether it's a good buy? what financial figures associated with shares of stock might be used in the caculation? consider the per-share figures and ratios discussed in Chapter 3, including EPS, dividends, book value per share, etc. does one measure make more sense than the others? what factors would make a stock worth more or less than your calculated value?Explanation / Answer
How might you use the same idea to value securities, especially the stock of large publicly held companies?
I value the securities of large companies by
1) Observing their Quarterly or yearly financial reports
2) Ratios:-( Financial ratios and liquidity ratios)
Is there a way to calculate a value which could be compared to the stock's market price that could be compared to the stock market price that would tell an investor whether it's a good buy?
Yes there is a way to compare stock market price, by calculating different ratios like financial ratios and liquidity ratios etc and also Earning per share calculation and book value per share calculation also helps you
What financial figures associated with shares of stock might be used in the calculation?
Total Liabilities
Owners Equity or Net Worth
Total Current Assets
Total Current Liabilities
Total Quick Assets
Inventory
Dividend on Preferred stock
Average outstanding shares
Net income
stock holders equity
preferred stock
Average outstanding shares
All this figures are used
Current Ratio: This ratio is obtained by dividing the 'Total Current Assets' of a company by its 'Total Current Liabilities'. The ratio is regarded as a test of liquidity for a company. It expresses the 'working capital' relationship of current assets available to meet the company's current obligations.
The formula:
Debt to Equity Ratio: This ratio is obtained by dividing the 'Total Liability or Debt ' of a company by its 'Owners Equity a.k.a Net Worth'. The ratio measures how the company is leveraging its debt against the capital employed by its owners. If the liabilities exceed the net worth then in that case the creditors have more stake than the shareowners.
The formula:
The formula:
Quick Ratio = Total Quick Assets/ Total Current Liabilities
Earnings per share (EPS)
The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability.
Calculated as:
EPS = Net income – Dividend on Preferred stock / Average outstanding shares
When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.
Book value per share
Book value per share = stock holders equity – preferred stock / Average outstanding shares
Somewhat similar to the earnings per share, but it relates the stockholder's equity to the number of shares outstanding, giving the shares a raw value.
What factors would make a stock worth more or less than your calculated value?
As we seen in the above question every ratio has some rules, the highest ratio will selected. As in
Earnings per share we see whether the earnings are more are not we select the highest
Total Liabilities
Owners Equity or Net Worth
Total Current Assets
Total Current Liabilities
Total Quick Assets
Inventory
Dividend on Preferred stock
Average outstanding shares
Net income
stock holders equity
preferred stock
Average outstanding shares
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