Economic Value of a Share

The value of a share can also be calculated based on the capacity of a company to generate wealth for their holders. For it, you can make an updating of the cash flow that are predicted for the company in the future. This value is not obtained based on the assets and liabilities that the company has, but based on its capacity to generate cash flow.

There are different methods to determine the value of a company and its shares. In the former division we have made reference to the site value that is based on the balance sheet of a company. The limitations of the balance sheet as an indicator of the value of the company have been pointed out, but also another important limitation is that they are statistics data referring to a determined moment in the past of the company. This historical data, although useful, cannot determine the future growth of the company , and they do not inform about their expectancy, or of its capacity to generate wealth, in the present for the shareholders.

The use of earnings even if it is the anticipated for the next exercises has the limitation that it is of a magnitude that sometimes it may be far apart from the cash money that the company can generate for the shareholders. This withdrawal can be produced by the differences between the accruals of expenses and incomes and the moments of payment or collection, due to the investment policies, etc. For these types of reasons, in the last years the method to validate companies and shares that has become more popular is based on the updating of the so called free cash flows. These give information about the differences between the income and outlay of cash. That is, the entry of money into the company minus the money that goes out from it.

The free cash flow, or flow of operative funds, is the flow of funds generated by the operations after taxes. So it is money that is available in the company after having covered their needs or reinvestments in fixed assets and the operative funds needs of the company.

To calculate the free cash flow, you usually begin from the net earnings of the exercise. in this way, once the net earnings of the company is obtained, you must add the corresponding amortization of the period due that it is only a cost that does not carry any money payment. In second place, you must take into account the necessary sum for the needed operative funds (investment in working capital, that is, stock, customers, supplies and other exploitation debts) and the new investments in fixed assets.

Beginner Money Investing Analysis of Stock Exchange Ratios Company Growth Share Value Economic Value of a Share Formula Book Value of a Share Real Value of a Share Economic Value of a Share Market Price of Share Per Share Ratio Results Cash Flow PER & Multiplier The Beta Risk Factor