Variety of prices when considering a company as an investment object
In the fundamental analysis, it is necessary to distinguish the estimated estimation of the whole company (company value, business value - value of firm, value of business ) and the cost of only own (joint-stock) capital (typical definitions - shareholder value, designation - , shareholders value. The estimated equity (S) and the equity valuation (E), the estimated target price of the share (fair price), the stock valuation of the share and the par value of the share should not be confused. Often the estimated value of one share is calculated through the algorithm for calculating the shareholder value (ie through the valuation of equity).
Fair value of shares = Fair shareholder value/Number of ordinary shares in circulation.
The number of shares in circulation shows the total number of shares at the hands of owners of own capital, ie. from individuals and legal entities, as well as shares in nominal holding.
If a company works only on its own capital, then the company's valuation ( value of film) and market valuation of its own (shareholder) capital (shareholders value, S) are the same. If there are borrowed capital in the sources of financing, the estimation of the whole company (of its total capital) is equal to the sum of market valuations of its own (5) and borrowed (& pound;) capital:
MV of firm = V = S + D.
Accordingly, a fair shareholder value can be found through calculating the value of the entire company and then subtracting the debt:
S = V-D.
Elements of borrowed capital include not only bonds and bank loans used on a permanent basis, but also preferred shares that are considered in the world practice of financial analysis (note - not standard financial reporting) as an element of borrowed capital.
At the same time, balance sheet estimates (recorded in standard financial statements) most often do not coincide with market ones. Especially great are the differences in equity. The balance sheet of equity ( equity , E) can be either above the market valuation of equity (5) or below. If the balance sheet is below the market, moreover, if the replacement value of the company's assets is below market valuation, then the company is attractive for investment, in the language of financial analysts it has investment opportunities, i.е. can attract capital. If the replacement value of the company's assets or its book value ( book value, BV) is higher than the estimated market value (MV or V), the market share in this company does not appear to be investment-wise.
For a company's borrowed capital, the discrepancies between the balance sheet valuation of constantly borrowed (often fixed as long-term) loans ( BVD ) and their market valuation (D) are often neglected.>
The book value of the company ( book value) - within the accounting and reporting standards the amount of valuations of various assets. The book value reflects the original cost (for example, the purchase price, installation, equipment adjustment) of long-lived assets less accumulated depreciation, as well as the funds necessary to cover the company's liabilities (for example, money, short-term securities, stocks). The peculiarity of the balance sheet is the mechanical amount by the chain of available assets, without taking into account their own contribution to the generated money and mutual influences. Liquidation value ( liquidation value) - the value of assets that an owner can receive upon liquidation of a business and selling it in parts.
Thus, BE = E (balance sheet valuation of own (share) capital); BVD - balance sheet valuation of the borrowed (paid and used on a permanent basis) capital; BV - balance sheet valuation of the company; MV = MVF = V - the company's market valuation as a calculated value (a synonym for the company's fair value); S - market valuation of equity; D - market valuation of borrowed capital.
The estimated valuation of equity (5) in the framework of fundamental analysis in the literature is often referred to as a theoretical estimate of equity, the company's shareholder value.
Another common term when discussing a company's price on the market is a reasonable cost. Fair market value (fair market value) is the official legal standard used in valuation activities. This is the price of purchase and sale, when both parties are interested in the transaction, are not acting under compulsion and have full information about the terms of the transaction.
The justified market value is defined as the price, expressed in money or their equivalents, at which the property would pass from hand to hand. This term often appears in legal proceedings related to the determination of the taxable base, in inheritance and donation situations, in the case of lawsuits filed by minority shareholders in defense of their interests in restructuring transactions (asset allocation, mergers, acquisitions).
The term capitalization reflects the company's valuation of market investors on the financial (market) market. There are total capitalization as the market's assessment of all financial assets issued by the company and market capitalization (market capitalization, MS ) as an exchange valuation of only ordinary shares.
Market capitalization = Exchange price of common stock х Number of ordinary shares in circulation.
Note that the number of shares in circulation does not include treasury shares (which are on the balance sheet of the company itself).
Total capitalization = The sum of all elements of the company's capital according to their observable market valuations.
At the same time, all shares are evaluated based on the observed estimates of quoted and traded securities, the number of which can be significantly less than the total number of shares in circulation by the company.
If the stock price (exchange quotes) correctly reflects the investment quality of the business, then the value of market capitalization will be close to the market valuation of equity (shareholder value or fundamental valuation of equity).
Close to TS valuation - "company capitalization" often referred to as EV (enterprise value ):
EV = Market capitalization + Estimated but to the balance values of long-term and short-term paid financing sources of the company, including preferred shares - Current cash (in balance assets).
This estimate is due to the lack of exchange quotations for all elements of borrowed capital.
Let's compare two concepts of market value (calculated and observable) in the assessment of the whole company (business).
Estimated value based on analysis of fundamental and specific factors. This is an assessment of analysts
Observed in the market values for own and borrowed capital and the calculated total value
The current market valuation of all invested capital in the company (V). The calculated value determined by this or that algorithm, for example, the DCFc method with the and WACC indicators (we mean that V = f (FCF, WACC)). The algorithm is possible through the calculation of shareholder value (in terms of FCFE and ks) and the summation of S with the market valuation of debt (V = S + D)
Total capitalization (HS) - the assessment by market investors of all elements of the company's capital. TC = Market capitalization (i.e. MS) + Estimation of market values of long-term and short-term paid sources of company financing, including preference shares
The assumption of a perfect market allows us to bring together two concepts - market capitalization (MS ) and a fair valuation of equity (S). However, in finance theory, they are never identified. In effective markets (the concept introduced by Yu. Fama and emphasizing the quality of information), one can speak of the coincidence of the trends of fair valuation and market capitalization and the random nature of deviations in stock prices from the estimated estimate. The random character is manifested in small values of the amplitude of the deviations and in the temporal shortness of the discrepancy.
Because in reality, the price of a stock is influenced by a number of factors in imperfect markets (low liquidity of stocks, market restrictions associated with trading on the exchange, asymmetric information and false information signals sent by company managers, crowd effects "in the stock market) , we can only talk about some degree of approximation of market capitalization to a fundamental assessment of equity. The more effective the market, the closer these values.
The goal of an investor guided by the principles of fundamental analysis is to determine the fair value of a company or other investment object. The identification of companies that are undervalued or overvalued relative to the fair value (current market price of which is lower or higher than the estimated investment value) makes it possible to separate investment-attractive objects from unattractive ones.
The opinion of E. Bolton - the president of the investment department Fidelity International (the international division of one of the world's largest fund management companies Fidelity Investments ), which managed the Fidelity Special Fund Situations for more than 27 years:
"I always believed that using a fundamental analysis to predict the stock market, coupled with technical, brings the maximum benefit. Some, I know, find it strange that people who attach great importance to such factors as the quality of business and corporate governance, the estimated value of shares based on multiples, are ready to draw some conclusions and make investment decisions, only by looking at the chart of the dynamics of quotations.
When I begin to analyze the stock, almost always the first thing I look at is its three- or five-year schedule. I like to evaluate the current situation in the context of the recent price history.
I will look very differently at stocks, one of which has grown well in recent years, and the other has not. When I find a new interesting company or go back to a forgotten paper for a while, the first thing I try to find out is whether I am at the beginning of a story that can result in a significant increase in quotations, or many investors have already bought shares of this company, by me just now. Usually this can be understood instantly, it is enough to look at the price chart. More cautiously, I will refer to the stock, which has already shown significant growth and which has many good news already put in the price.
The charts are also good for sorting and filtering the chain of securities inside the investment portfolio. Although I will never buy a stock based solely on charts, careful study of them can help me select companies that I want to take a closer look at and evaluate them from a fundamental perspective. Viewing a series of graphs can also help me get an idea of the attractiveness of the market as a whole.
Technical analysis is the basis on which I build fundamental estimates to make a bet on individual stocks. In practice, this is the case: if technical indicators confirm my fundamental views, I will take a larger position in a particular action than when they conflict with each other.
If I own the stock and its technical indicators begin to deteriorate, I will want to re-analyze the reasons that prompted me to once invest in it. It is necessary to check whether I have not missed anything, if any negative factors have passed by me. If the fundamental views are still very strong, I will ignore the technical changes. Otherwise, I can reduce the position.
Managing assets, I liked, at least once a month, to view all stocks in my portfolio from a technical point of view and divide them into subspecies: papers where the technical position supports a fundamental view; shares where they conflict; and shares, where there is no clear signal.
I found particularly useful technical analysis of shares of medium and, in particular, the largest companies. As for the market leaders, it is often difficult to take into account all the factors that influence the efficiency of the company's business and the dynamics of its shares. Large companies are the hardest to analyze, because they are more difficult than others. Therefore, here I look at the technical situation as the sum of all the fundamental views that are available on the market at the moment.
Maybe it will seem amazing, but from my point of view, it's not so much what exactly the technical analysis system you use, how many systematic application of the graphs in itself. I'm not a big fan of systems that just follow the figures on the chart, although some figures - for example, such as the V-shaped dynamics of the market - are repeated again and again. However, graphs help us stay in stocks that are growing and make us limit losses when they start to fall - this is the immense power of technical analysis. In addition, it is not easy to sell an action that you fundamentally like, but which does not allow you to earn on it. And analysis of the graph can encourage you to do this.
In addition to the fact that the graphs show the price history, they are the best way to reflect the totality of the fundamental, economic, subjective and other types of data that we take into account when evaluating the share. They are easy to read, and the brain at one time can perceive a huge amount of information. Investors ignoring graphics do so at their own peril and risk. "
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