How to work out what a share is worth?

Question

How do i work out how much a particular share is worth to see if it is over or under valued?

Answer 1

Over and Under value are terms that suggest that the share has some value aside from what folks are willing to buy and sell it. That is nonsense, propagated by academics and economists. The stock market is like a bazaar, where people meet to haggle over the price of the stock. And that price is its value. There is no other number. Calculate forever, but the market price is always the market price.

Answer 2

Divide the share's annual dividend by the share's price * 100 gives you the percentage dividend yield.

This is similar to bank account interest rates and tells you the percentage return you'll receive in dividends from your investment.

A higher yield usually indicates that the share is cheap (has value).

Now, if it's cheap it's either because negative sentiment has driven down the share price for no reason which will affect the long term performance or it's been overlooked (investors are backing other shares (happened in the tech boom)) or there's something very wrong with the share which hasn't been made public and may affect the next dividend.

If you think the share's long term performance is ok - go for it - it'll be paying you good dividends whilst you wait for capital appreciation (hopefully!).

There are of course other ways to value shares - suggest you buy a good book on the subject.

Obviously do your own research and only invest what you can afford, there's risk involved - understand the risks!

Answer 3

There are whole courses on this in Business School. There are books about it at the library and the bookstore. Pick one and read it. The book mentioned above by Graham is a classic. There are many different ways to value stocks. Some look at an estimate of earnings in the future, plus dividends, taking into account interest rates, and the current price. They can get very complicated. And there's a lot of judgment involved. Other methods look at the earnings of all companies in an industry, and apply the same price/earnings ratio to all the companies, assuming that the risk for all the companies in the same industry is similar.

When news comes out about a company, investors tend to drive the stock up or down based on the news. Let's say that there's a small fire in some GM manufacturing plant. As a result, GM's price goes down a couple bucks. That doesn't really make sense, since the long term prospects of GM haven't changed. Some people buy after bad news - assuming its not real bad news....

Answer 4

A share is only worth what someone is willing to pay for it.

They can be valued according to dividend yield ie the cost of the share compared to the dividend paid . They can also be valued according to net assets divided by shares issued but this is only a snapshot of one period of time and there may be hidden reserves in undervalued assets or potential trading losses which haven't yet hit the books. Also be aware of wrongly valued assets ie a fashion business showing garments at cost but no-one actually wants them as they are now out of fashion .
Over or under valued depends on more than one factor which is why they fluctuate in value so much.

Answer 5

Two methods are :-
1) Assume the company will 'live for ever' ..
Then the share is worth the sum of the Dividends from now untill infinity DISCOUNTED to today (assume Dividends = static use RPI as the discount rate)

Problem here is that Companies paying zero dividends are worth zero :-)

So you could plug in some assumptions about future dividends ..

2) Assume the Company has a limited life eg. 30 years.
Then the worth = 30 years of dividends Discounted to today
PLUS Total Assets MINUS Total Liabilities, again Discounted to today

This allows Company Debt (== 'gearing') to be taken into account, but you have to assume essentially no change in Assets or Debt over the 30 years ..

Answer 6

This is normally done using a series of ratios that compare various components of a company's accounts.

For example, how much debt to capital is there, or how much revenue per employee.

There are other less tangible facts to take into account as well. For example, how much market share the company has, does it have any secret patents or unique products to establish if they are under or over valued.

There are a number of websites that provide reports on companies for a fee including MSN Money and Reuters.

Answer 7

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Answer 8

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Answer 9

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Answer 10

** I AM NOT A FINANCIAL ADVISOR -- DO YOUR OWN DUE DILIGENCE **

One quick way to estimate defensive share price was invented by Benjamin Graham. It's the square root of 22.5 * Earnings Per Share * Book Value Per Share. So for Bank of America at the close (according to Google Finance)

square root (22.5 * 4.41 (EPS) * 138.5 / 4.44 (BPS, which is also book equity divided by # of shares outstanding))
= $55.63 ...

So technically, BAC is undervalued. However, you need to consider the current environment, because the EPS and BPS numbers are backward looking, while share price is forward looking.