Book value
As per Wiki
In fundamental analysis of stock share values, the book value of an entire company is its shareholders’ equity. Shareholders’ equity is the company’s assets minus its liabilities. If a company’s shareholders’ equity is Rs 100,000, the book value of the company is Rs 100,000. If the company has 1,000 shares outstanding, each share has a book value of Rs 100.
Evaluating stock on the basis of Book Value
Book value is used in the financial ratio price/book. It is a valuation metric that sets the floor for stock prices under a worst-case scenario. When a business is liquidated, the book value is what may be left over for the owners after all the debts are paid. Paying only a price/book = 1 means the investor will get all his investment back. i.e. If the company is bankrupt then also you will get what is the value of the price and so in Share market you hardly get any stock at 1 Book value.
What should be the fair book value
Shares of capital intensive industries trade at lower price/book ratios because they generate lower earnings per shares. Business depending on non-capital will generate higher earnings of assets, so will trade at higher price/book ratios. Monthly or annual depreciation, are used to reduce the book value of assets over time as they are “consumed” or used up in the process of obtaining revenue.
Earnings per share
One factor strongly affecting a stock’s price is earnings growth. All other things being equal, if a stock’s earnings grow by 10% in a given year, we might expect the stock’s price to also rise by 10% in order to maintain about the same Price is to Earnings ratio.
So before buying a stock, we’d like to get an idea of how earnings may grow in the next year, two years, or more. One way would be to look up the analysts’ predictions on future earnings-per-share (EPS) in either free or fee publications.
You can use many methods to calculate EPS of shares. One of them being DCF to calculate fair value of share price
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{ 4 comments… read them below or add one }
Good and simple explaination to the common investor unused to complex “Share Equations” and “Jargon”.
Thanks for the wonderful feedback Rudolph
i calculate my script profit or loss by brockrage/
thanks for the info:))