SUMMARY SECTION
Intrinsic Value, also known as fundamental Value, is the investor’s perception of the actual value of a company or asset. The intrinsic value may or may not be equal to the current market value of an asset. It is used by investors who want to buy stock and other assets at a discount.
ARTICLE TITLE: INTRINSIC VALUE
CONTENT
Intrinsic Value
An Intrinsic Value is the value of a company, stock, dividends or assets with less focus on the market price. It is the difference between a stock price and a strike price. It helps in determining the worth of a commodity and paying less of what it is worth, considering the average future earning power. A general way of determining the intrinsic value is by estimating the …show more content…
The book value of equity is the value of a company's assets expressed on a balance sheet, i.e., the book value of assets minus the book value of liabilities. For example, if the book value of a company is $50 million and 5 million shares are outstanding, each share would represent $10 of book value. If each share sells on the market at $5, then the P/B ratio would be 2 (10/5).
When a company is trading for less than its book value or the P/B less than one, that means that it is either the market believes the asset value is overstated or the company’s earnings are low (> 1 or even negative return on its assets). If the estimate of the returns is less than one or zero, the investors should avoid investing in the company’s shares because there is a high likelihood of a negative return. On the other hand, if the estimate of returns is more than one, there is a likelihood of a high return. In a situation where this does not happen, the book value can be broken up for its asset value, earning the shareholders a profit. When the company has a high share price in comparison to its asset value, there is a likelihood that it is earning a high return on its