cc @Greenbackd “Investing isn’t hard. Buy stocks below intrinsic value.” “How do you calculate intrinsic value?” “That’s hard.”
— Dave Collum (@DavidBCollum) September 11, 2015
Had a hearty chuckle when I read this tweet that accurately summarizes my understanding of value investing. It’s all very well to say you only buy value but incredibly hard to be sure about what constitutes value.
I retweeted it only to get a response that read
“Leave alone intrinsic value, I’m not even clear about the difference between terms like face value, book value and market value!”
I thought to myself, that one I can respond to with some confidence. So, although this post won’t offer blinding insight, it’ll help those who’re accounting or finance-challenged.
So, what is the difference between face value, book value and market value of a stock?
Face value is an accounting representation of the value of a company’s common stock on it’s balance sheet.
Here’s a look at Cipla’s balance sheet, the Equity share capital shown is calculated as Face value X No. of Shares. Cipla’s equity share capital is 160.59 Crores (1605.9 Million)
From a retail investor’s point of view, it has no bearing on the actual value of the company
Cipla has 8,029.60 Lakh shares in issue, so the face value is the Equity Share Capital / No. of Shares (16,059 Crores/8029.60 Lakhs) = Rs 2 / share.
Cipla’s Face Value / Share = Rs 2.0 (won’t change unless the company splits the stock to halve the stock price by doubling the number of shares)
Book Value is value of the company’s assets if it were to be liquidated on a day less all debt-holder claims
In the example here with Cipla:
Total assets = Rs 12,461.79 Cr
Total Debt = Rs 1,380.61 Cr
Book Value / Share = (Total Assets – Total Debt) / No. of shares
Cipla’s Book Value / Share (FY14) = Rs 138 (will change yearly as per business performance)
Market value is the current price at which the common shares of a company change hands, meaning the market’s point-in-time estimate of the company’s value (less the debt). Meaning it’s a point-in-time consensus estimate of the millions of people / financial institutions / insider traders of what the company is worth.
Cipla’s Market Value / Share (Sep 11th 3.30pm) = Rs 653 (in the short term will change moment-to-moment as per whims of the market sentiment, long term direction is driven by business performance)
Now, whether that value is above or below intrinsic value of a stock, is a much more subjective issue, one that every value investor seeks to master.
If you’ve wondered about the difference between stock splits and bonus issues link
If you’re a new investor who’s thinking about buying your first stock
If you’re looking to develop a robust process to identify stocks
If you’re a value investor and wonder whether buying cheap NIFTY stocks can beat the index
Or download the free TCI Rapid X-Ray template to quickly analyze companies