The fair value of a stock can be calculated using present value and projected earnings, with smart investors looking for a reasonable value above the purchase price or acceptable price-earnings ratio. Financial analysts determine fair value by comparing a company’s financial statements and projecting future earnings. The fair value can also be determined by a stock’s price-earnings ratio and earnings-per-share projection.
The fair value of a share can be calculated using the concept of present value. With this type of calculation, the projected income streams from the stock are discounted to what they would be worth at the point of purchase. Smart investors look for stocks that have a reasonable value above the current purchase price or an acceptable price-earnings ratio. Projected earnings from a stock are calculated using a company’s financial statements, such as the balance sheet, income statement, and statement of cash flows.
The intrinsic value of the investment is equivalent to the fair value of a share. It is the value contained within the property and is influenced by internal factors, such as a company’s dividend payment policy. One way that stock analysts try to determine the fair price of a stock is to compare its current market price with what the stock is projected to earn over a specified period of time.
Possible future sources of income to be received from owning a particular stock can be determined by examining a company’s financial statements. Financial analysts try to speculate on a company’s financial performance by comparing its assets with its liabilities, how it uses cash, and the strength of its market position. The fair value of a stock is calculated per share taking into account future earnings, which are affected by a company’s projected sales growth, market share, and net earnings. Once a stock’s potential future earnings are determined, the next step is to discount those cash flows back to their present value.
Most financial calculators will discount a future cash flow to its present value in seconds. A present value simply takes future earnings and determines what they would be worth today. It is similar to the concept of deflation, where value is discounted against the rate of return or growth. For example, if an investment that earns six percent will produce a future payment of $100 United States Dollars (USD) in five years, the present value calculation would discount the $100 USD at six percent over five annual periods.
Some investors and analysts determine the fair value of a stock by its price-earnings (PE) ratio. The ratio is simply the stock’s market price divided by its projected earnings. An annual earnings growth ratio is compared to the stock’s PE ratio, with a good stock having an annual earnings growth ratio equal to or greater than its PE ratio. A stock’s fair value is also compared on a per-share basis, with a strong share price equal to or less than its earnings-per-share projection.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
