Basic Stock Valuation Methods
Stock valuation is a process undertaken by stock investors to arrive at the real or “intrinsic” value of a share based on data collected from the company’s financial statements. While there are a number of different approaches for this, they all revolve around assigning a value to the stock today based on the future performance of the company.
Discounted Cash Flow
Discounted cash flow is a method for finding the present value of a stock by estimating the future cash flows of a company. The sum of these future cash flows is then discounted to a current value. While there are a number of variations to this approach, the goal is always in estimating the income you would receive from an investment and discount it appropriately for the time value of money. As with any valuation approach, the discounted cash flow model relies on the input of accurate data.
Net Current Asset Value Per Share
Net Current Asset Value Per Share is a measure created by the great value investor, Benjamin Graham, to determine whether a stock is trading at a “bargain” price. Under the NCAVPS approach, the company’s total liabilities are subtracted from its current assets. That figure is then divided by the number of share outstanding. Graham believes that, as long as the company was financially sound, it presented a good investment opportunity if the stock price was no more than 67% of the NCAVPS.
Dividend Discount Model
The Dividend Discount Model says that rather than company earnings, a share of stock is worth the present value of its future dividends. The Dividend Discount Model attempts to arrive at the value of a stock by discounting the expected future dividends of a company to their present value. If that value is higher than the current price of a share, that stock is thought to be undervalued. This approach is most commonly used in valuing larger, more mature companies with a history of paying a regular dividend.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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