How does one measure the intrinsic value of a company?

Question

How does one measure the intrinsic value of a company?

Answer 1

Assuming intrinsic value is inherent value, then you would calculate value of buildings, machinery, stock, debtors and deduct loans, creditors etc anyything tangible.

Presumably you would not add goodwill, extra value of half finished goods, dubious debtors or things that may not realise their potential value.

What is the intrinsic value of a 40 year old machine that is producing goods for your at a huge profit?

Answer 2

Good question. Try this simple technique. Ask 10 people who know that company in some way or the other the following question: When I utter the world Company A then what are the words that come to your mind. The answer will comprise some words which are brand associations, such as slow to market, market driven, cash rich etc. The other words will be brands. For instance, Portamante (a name of a product made by that company) Mr Fisher (Name of the guy who owns the maximum number of shares) This will reveal the brands the company owns and also reveal its intrinsic value. ROI will give you the extrinsic value not the intrinsic value. If SONY went bankrupt its ROI would be nil but SONY would still be a great brand and hence with great intrinsic value.

Answer 3

ROI

Answer 4

That is difficult.

Firstly you have assets, both physical and intellectual.

This is of course minus your debts.

You have turnover (cash flow) which should continue even if ownership changes.

But there are values that are hard to measure.

For example, many IT companies spend big bucks on ideas, hoping they will pay off (imagine handing over 5, 10, 100 Million for a company with no assests, almost no income, debts and a good idea...well that is what google and yahoo do all the time).

There is reputation, brand awareness and so on. People will watch some riduculous sport during the olympics that they won't care about during a world championship which has the same people.

There is also market placement. A successful company today might not be successful tomorrow because of changes in the market (or maybe it will be opposite).

These latter things are hard to measure.

Answer 5

And after you measure this, what good does it do you?

Stocks are valued based on the market participants'  hopes and fears for the future.  If the market doesn't think much of the company's prospects, the price will go down, regardless of the number that you may derive from past statistics.