mahmeds2000 said:
Hi munchikana,amit29,jdm,
Thanks for giving reply. Actually i think i wanted to know the same said by munchikana method of calculation of intrinsic value of share. So if you know it please explain it here this will help other pepole also.
thanks in advance
wrgrds
Ahmed
Dear Ahmed,
Whatever I have read about "intrinsic value" of share, I am writing here. I may be partially right and I may be wrong on some aspects. If I am wrong on any aspect, I give an open invitation to all members of this forum to correct the portions where I have gone wrong. My sources of information are very limited.
Calculation of intrinsic value of a share looks nice only as a concept and according to me it is neither practicable nor advisible for ordinary share traders like me. First the theory part.
Intrinsic value means, intrinsic value of the company. In simple terms, how much the company is really worth if you were asked to buy it outright today. That brings the question, how to value the company? Is it the value of its land, plant and machienary? Shall we include the raw materials, stocks in trade? What about the investments made by the company in other companies and other subsidieries? What about the debts owned to the company and debts owned by the company to others? Should we include all of them in our calculation? How do you value the brand value of the products that are sold by the company? Problems do not end here. If the company is in an expansion mode, how much the new project would contribute to the balance sheet of the company? I hope now you realise that these are the only sample questions posed by me on the topic. These questions make it clear that it not our cup of tea. So if you are able to arrive at the actual figure of the worth of the company, then you will have to divide it by the existing equity capital. That will give the actual value of the per share of the company as on today. But wait. Market is not discounting the past. Market is always the future growth. So you must be able to forcast the future growth as well in your calculations. After doing all these calculations, you will actually know what is the company really worth for and this figure must be equally divided by the equity capital. That is the intrinsic value of the share of that company. If the share is quoting below that intrinsic value, you are going to buy it. If it is quoting far above it, you are going to sell it.
Limitations with ordinary people like me are
(1) Except the annual reports we do not have any other information about the financials of the company especially its future plans.
(2) Most of the annual reports are window dressed. I suggest you to read notes prepared by the auditor on the accounts of the company in the annual report. You will know how much under provisioning is there. You will also get some idea as to how the profits have been infalted. Sometimes, these people make such a magic that even loss making company is shown as a profit making company.
(3) In some balance sheets, plants and machinaries are revalued so as to boost the reserves. However, in some balance sheets, they are valued at their cost minus depriciation.
(4) Land is usually valued at its acquisition cost. You may note that some of these companies have acquired very important places in cities long time ago. If they are still shown at their acquisition value, then it will be a gross understatement. Just to give a real life example, I am told that nearly 75% branches of Syndicate Bank are operating in their own premises (not in rented premises). Almost all of them were acquired several decades ago. You may verify this fact from the branch office of the Bank if you have one near you. You may see where these branches are located. Most of these branches, which I have seen are located in highly commercially valuable areas, that too in big cities. Even now also, these properties are shown at their acquisition cost in the balance sheet. I donot have a copy of balance sheet, if you have one, you may verify it. The real market value of these properties is worth far in excess of the share capital of Syndicate Bank. Now tell me, how do you value this?
What I am trying to point out is that there are very many variables in calculating the intrinsic value of the company. Further we are having our own limitaions also. I may value one asset at xxx rupees. But you may value it at yyy rupees. What I view as an excellent opportunity may be a foolish adventure in your opinion.
I hope I have not created more doubts in your mind than you originally had
