Investing Feeds

The value of a company can be arrived at in a number of ways from records available publicly. Whilst the stock price will let you know what the market thinks a company is worth, it is important for the prospective investor to be able to spot quickly if a stock price is actually underpricing a company.The first way in which analysts will arrive at a value for a company is by comparing the Net Assets of a company to its stock issue. This generally gives a figure which equates to the value of a company if it were taken over, or went into administration, and was broken up and sold off. Follow a simple example thus:

A Plc reports the following Data in its financial statements.

Net Assets

$4 million

Current Issue

1 Million Ordinary Shares

Current Stock Price

$3.00 per share

In analyzing the data you realize that even if the company were in imminent danger of break up its net assets divided by its issue equates to $4.00 per share, and the market price is lower than this figure. Assuming the market did not have any extraneous data, that there were balance sheet irregularities, or that the asset valuations were not sound, then the stock is definitely worth an investment, as regardless of performance the assets outstrip the price of the shares. Whilst this is rare, the market can neglect shares, and especially in startups the price can be out balanced by assets. Be very careful though, and remember that old adage of the market, if it looks too good to be true, then it probably is. This sort of analysis should only be undertaken in conjunction with other forms of analysis to uncover the real reasons for low share price.