In This Chapter
Calculating intrinsic value and dealing with worksheet models
Evaluating return on equity
Figuring out when the price is right
Using a practical value investing approach
To be consistent with the value investing approach, you must understand what a company is worth before you make an investment decision. If only it were so simple. Valuation has been the subject of vast theoretical study and debate — as well as experience and learning — in the investing community. Business valuation is at best an inexact science that no two people do exactly the same way. The goal of this chapter is to expose you to some of the techniques and underlying principles. Whether you apply them rigorously to every investment decision or just keep them in the back of your mind is up to you.
Intrinsic value is a present dollar value placed on the expected net returns generated by a business over time. Profits and growth drive intrinsic value. For any fairly priced asset to increase in value over time, the value of the returns must grow. ...