accounting

WayneMulligan answered one year ago …

Well there's no simple answer to this question so I'll give you the basic principles behind asset valuation. The one thing you have to remember is that the value of any asset, be it real estate, a bond or a business (and its stock), is the present value of all the future cash flows of that asset. So let's say you're looking into Company XYZ's annual reports - the first thing you'll want to know is what their profits looked like for the last 10 - 20 years. This might give you an indication what what their profits will look like for the next 10 - 20 years. Then you'll estimate those profits and then go through a process known as "discounting" (too long to get into here, but feel free to ask about it, I'm sure someone will describe the process) the cash flows. Once you do that you'll have an approximate value for the company - now that doesn't mean that's what you should pay for it...a real hardcore value investor will only buy a company (or its stock) if its trading for 50% or less of the company's value. I know that was a "quickie" answer but I hope it helped a bit. If you have other questions along this same topic, please ask.