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MARKET VALUE The value of any company placed by the stock market is basically its share price times the number of issued shares. Our job as investors is to determine whether we are prepared to pay that price given our investment objectives and risk appetite. Market Capitalization (Market Cap) Market Cap = Number of Issued Shares x Latest Share Price For example if a company has 100 million shares and its share price is RM5, its market cap is RM500 million. In theory the stock market is placing a value of RM500 million for that whole company. Note: Appraising a company’s true value may become harder if there is a large number of derivative instruments (eg options/warrants) issued by a company.
Enterprise Value (EV) EV = Market Cap + Net Borrowings It is a measure of the value of a company’s businesses excluding the cash holdings and financial debt of the company. If a company has more cash than borrowings, then its EV will be Market Cap less the net cash position. Why Do We Have to Look at EV and not just Market Cap? EV is basically the value of a company excluding its cash and debt position. When buying a business, we need to consider the value of its business assets and cash position separately. This is because cash can be valued dollar-for-dollar while business assets (such as plant & equipment, inventory and intangibles) are collectively valued depending on the future income it can generate. Since we are buying business assets and systems to generate future income streams, therefore we need to properly appraise the value of the business without distortion from cash holdings and debt. Note: Companies do not publish their cash / debt position every day. So EV is calculated using the latest available audited balance.
Net Tangible Assets (NTA) NTA = (Shareholders Funds – Intangible Assets) / No of Issued Shares This is a quick and useful way to get a feel for a company’s value. For example, if a company’s NTA is RM1.50 and its share price is RM3.00, it implies a company’s share price is trading at twice its tangible book value. This in itself is quite meaningless because most good companies have undervalued assets due to accounting conservatism. However it is a useful indicator when benchmarking against industry peers. For example if you follow the banking sector and find that the average NTA multiple is around 2.3x and if a banking stock became available at 1.6x NTA, you would become excited and perhaps look at it more closely. Go to Valuation Indicators |
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