Is there a formula for determining the fair market value of a stock ? Earnings ?

Question

book value, sales, company size, outstanding shares etc. ?

Answer 1

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Answer 2

There is, but it relies on discounted cash flow of future cash flow which is based on projections into the future.  This unfortunately is virtually worthless since none of us can foretell the future.  That however does not prevent Wall Street analysts from nevertheless going through the motions.  But that is what they get paid for.  

Answer 3

As master investor Warren Buffett tells us, the value of a business is all the money that can be taken out of the business from now until Doomsday, discounted back to the present using an appropriate discount rate. The money that can be taken out of a business is free cash flow.  Free cash flow = cash flow - capital expenditures.  Cash flow = earnings (aka net income) + depletion, and depreciation, and ammortization. Additionally, cash on the company's balance sheet in excess of the company's debt is also money that can be taken out of the business, and adds to the value of the business. Once you determine the value of the business (that is, the entire company), divide by the number of shares outstanding to determine an appropriate price per share.

For further details on how to do this, I'd recommend reading the book "The Warren Buffett Way" by Hagstrom, available at many public libraries. (Preferably the version with the foreword by Peter Lynch.)

Buffett prefers to invest in predictable businesses that have shareholder-oriented management, little to no long-term debt, high returns on equity and capital, and strong brands or competitive advantages.  He also likes to pay a significant discount to what a company is actually worth, in order to minimize his chances of losing money and to increase his return potential.

Answer 4

That depends.

If there were a forumla that everyone agreed on, there wouldn't be much of a stock market.

Answer 5

Fair market value is determined by the purchase price on the stock market on which it is traded.  Earnings should be listed in stock info and are based on dividends, splits, etc.

Answer 6

There are lots of formulae for determining fair market value. Unfortunately stocks rarely trade at fair market value.  

Answer 7

If it were as easy as a single formula everyone could make money.  There are many formulas to determine fair value of a stock, depending on its attributes and transparency.  All of them should agree within fairly narrow boundaries.  If they dont then the formula isnt viable or the stock isnt transparent, meaning there is not enough information to determine fair value with any accuracy.  Warren Buffett has a very good formula for determining valuation.  Thats obvious from his success.  But he eliminates commoditiezed businesses.  And free cash flow does not work in a commoditized business because they are capital intensive and free cash flow goes into renewing and improving the assets of of the business.  Because that is their only competitive advantage when they produce a product or service that has little differentiation from another.  Having said all that one of my favorite valuation methods is the risk premium.  Take next years earnings and divide it by the current price.  The result is the expected return.  The higher the better.  Its simple.  Its simple.  It works as well as any other methods.  And it cuts across all types of stocks.  You still have to deal with transparency  The variable is that future earnings estimates could change.  There are no absolutes.