Intrinsic Value – Balance Sheet Fundamentals
Novice and unsophisticated investors place greater reliance on net profits over the balance sheet fundamentals to determine intrinsic value.
This phase of lesson sets explains intrinsic value and financial analysis. There is no single formula that is universal; there are at least six common formulas to calculate intrinsic value. The various formulas require the user to understand the five different financial statements and how to properly interpret them.
Novice and unsophisticated investors place greater reliance on net profits over the balance sheet fundamentals to determine intrinsic value.
Intrinsic value’s definition has several different meanings when used in the business context. The word intrinsic refers to ‘innate’ or ‘inherent’.
Shifting from economic wide factors that impact market price to industry wide standards is essential with understanding and creating decision models for investment with a pool of similar companies.
With value investing, understanding the concepts of economics allows for a more comprehensive elevation of thought related to financial analysis.
Every student of investing is taught the core principle of discounted cash flows. This business principle is also used with intrinsic value.
If you think of the economy as a train pulling a load on the track, you would base its near future position on its current and historical trend. It is unlikely its current speed will change; thus, we can predict its future position with some degree of confidence.
Insolvency refers to the ability to pay bills in a timely manner. It does not mean bankruptcy but long-term insolvency is a underlying factor of bankruptcy.
Of the basic business principles, economies of scale has the greatest impact on profitability over any other business principle. As an enterprise’s investment is spread over higher volume the cost per unit of production decreases.
Break-even analysis is a managerial (cost) accounting tool used to examine the relationship of price to cost of a product. It also considers various sales volumes and the effect on profit given the different relationships of price to cost.
Those small publicly traded businesses with share prices of less than $5 and capitalization of less than $50 million are referred to as penny stocks.