Equity based stock valuation
Stock Valuation Part 3
Principles Of Equity Based Stock Valuation
Equity has many different meanings in the business world. Ideally, it is defined as what is left after a company pays off all of its debts, even if business were to cease immediately. This can be in the form of merchandise, cash on hand, tangible assets such as office buildings and equipment, and intangibles such as good will. When it comes to determining whether or not to buy stock in a company, one should consider the principles of equity based stock valuation.
Most investors want some real value for their dollars spent investing in a company. This is best achieved by choosing stocks from companies that have a high equity value as opposed to companies with heavy debt loads. One of the best ways to ensure this is by choosing companies that have more cash on hand than the current market value of their stocks.
A gentleman by the name of Ben Graham created a system for choosing such companies. He first took into account the amount of cash, cash equivalents, and investments that could be liquidated fairly easily. He would then divide this figure by the number of outstanding shares. This told him exactly how much of the current price per share was represented by the cash the company had on hand. He found that buying stock in a company with large amounts of cash held many benefits.
Another way to measure the value of a company is by looking at the company’s working capital. Working capital can be defined as the difference between a company’s assets and its liabilities. This represents what the company has available to use in the course of day to day operations. High working capital can be used to fund expansions and research, just as having a great deal of cash on hand.
One can also look at shareholder equity. This figure represents what would be left to divide among the shares of stock if the company were completely liquidated right now. This means that if all assets were sold right now and all the company’s debts were paid, the money that is left to split among the stockholders divided by the number of shares is the shareholder equity.
Equity based stock valuation is one of the better methods of determining if an investment is good or bad. One would much rather invest in a company with a great deal of equity than in a company with a high debt load and a great deal of risk.
Tags: business world, buying stock, cash equivalents, current market value, debt loads, debts, Equity, equity value, expansions, intangibles, investments, investors, liabilities, office buildings, outstanding shares, shareholder equity, stock valuation, stocks, tangible assets, working capitalRelated posts
Tagged with: business world • buying stock • cash equivalents • current market value • debt loads • debts • Equity • equity value • expansions • intangibles • investments • investors • liabilities • office buildings • outstanding shares • shareholder equity • stock valuation • stocks • tangible assets • working capital
Filed under: Stocks • Valuation
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