There are many factors to consider when valuing a company. Many investors choose to follow the strategy of the value investing, also known as value investing. For this, it is essential to know how to find out if the shares are below or above their real value, or at least know how to calculate their value at the accounting level. For this there is the theoretical value of a share, which we will talk about in this article.
First we will explain what exactly is the theoretical value of a share and then we will show you what its formula is, explaining the calculation with an example. In addition, we will comment a little on what value investing is. If you are thinking of investing, these concepts are fundamental, So I recommend that you keep reading.
What is the theoretical value of a share?
Also known as book value, the theoretical value of a stock It is that value that a company should have at an accounting level. It is achieved through a calculation made with data extracted from the balance sheet of the company in question.
Another name for this value is book value. To find out what it is, You have to calculate the difference between the assets that a company owns by subtracting from them its payment obligations or liabilities. The result is divided by the total number of shares issued by said company.
But what is the theoretical value of a share for? This value basically tells us what a company is worth, always speaking at the accounting level. It reflects that value since, to calculate it, the sum of all the assets or possessions of the company in question is used, such as buildings, machinery, etc., subtracting from the result the debts that the company has.
It should be noted that the theoretical book value is not the same as face value. Both concepts are often confused very often. The difference is that, to obtain the nominal value, the ratio between the share capital (not the assets) and the total number of shares issued by the company is calculated.
How is the theoretical value of a share calculated?
Now that we know what the theoretical value of a share is, let's see how it is calculated. In order to carry out this task, It is imperative that we know both the assets and liabilities of the company in question. The formula for calculating the underlying book value is as follows:
VTC (Theoretical Accounting Value) = Assets – Liabilities
As many of you already know, The result obtained by subtracting the liabilities from the assets of a company is known as net worth. Therefore, the complete formula to obtain the theoretical book value of a company's shares is as follows:
VTCa = Net worth / number of shares issued
The result of this operation is the theoretical accounting value per share, which tells us how much a share of a company would be worth in accounting terms. This concept is very useful for investors when they are thinking of investing in a certain company. A good option is to use it as a reference when it comes to seeing the price of the company's shares within the Stock market.
Taking into account what we have just explained, we can deduce that if the theoretical value of the share is lower than the value that the share presents on the stock market, it is a bad time to buy it. In this case, the company in question is overvalued and the growth expectations that exist for it are very high. Instead, if the theoretical value of the share is higher than the value of the share on the stock market, then it is a good time to buy, as it is quite likely that we will make profits in the future.
Calculation example
In order to make sure that we have understood the formula to calculate the theoretical value of a share, we are going to give a small example. Suppose we have a publicly traded company with assets of $200 million, to make round numbers. In addition, they have total liabilities of $50 million.
Knowing that his net worth amounts to a total of 150 million dollars, that is, 200 million minus the 50 million liabilities, we must now look at the number of shares outstanding. Suppose there are a total of 100 million shares issued, the formula to apply would be the following:
TVCa = $150.000.000 / 100.000.000 = $1,5
This tells us that the theoretical book value of the share is $1. Let us remember that if this value is above it on the stock market, it is a bad purchase, but if it is below it, it is a good purchase. In other words, if in the market, for whatever reason, the shares trade at $0, it would be a very interesting opportunity. Here the job would be to find out if this is something circumstantial due to some crisis in the sector or another, or if the company is really affected for some reason that the market has already discounted.
value investing
To finish, we are going to comment a little on what value investing is, also known as value investing. It is an investment philosophy that has very important followers and has become popular thanks to Warren Buffett and his teacher Benjamin Graham. This philosophy or strategy It is based on the purchase of securities when their market price is below their real value.
According to value investment, The best time to buy shares is when the market price is below the share's fundamental value. This is because the chances of its price increasing in the future are very high, as the market tends to adjust. Although it is true that it is a very good and very logical strategy, there are two major problems in carrying it out:
- Calculate or estimate what the intrinsic value of the title or share would be.
- Know how to predict how long it will take for the value to be reflected in the market.
Whether or not we are supporters of value investing, or value investing, knowing what it is and how to calculate the theoretical value of a share will come in handy when studying the value of a company and minimizing possible losses. Knowledge does not take up space!