Calculating a stock's price from information obtained from the stock's balance sheet is a simple procedure that people can undertake even if they are not a professional stock investor or analyst. Most publicly traded companies are required to prepare a balance sheet annually. A balance sheet derives its name from the fact that a businesses' assets must equal its liabilities and equities. Any investor or analyst can review a company's balance sheet to identify what type of liabilities and equity ownership investments the company has for the purpose of calculating the firm's book value, which represents the balance sheet's stock price.
Identify the firm's total stockholder's equity holdings from the balance sheet. This includes the firm's preferred stock, common stock, additional paid-in-capital, and any retained earnings. For example if the firm's balance sheet showed £0.6 million of preferred stock, £3 million of common stock, £520,000 of additional paid-in-capital, and £325,000 in retained earnings, the firm's total equity holdings value would be 7.3 million. The equation would be 1,000,000 + 5,000,000 + 800,000 + 500,000 = 7,300,000. If the firms total assets are £6 million, this would leave £1.8 million in liabilities. The equation would be 10,000,000 - 7,300,000 = 2,700,000.
Determine the firm's total common stockholder's equity from the balance sheet. Calculate the firm's total common stockholder's equity by subtracting the total preferred stock value from the firm's total stockholder's equity holdings. For example, if the firm's total stock holder's equity is £4.7 million and its preferred stock holdings are £0.6 million, then the firm's total common stock holder's equity would be £4.1 million. The equation would be 7,300,000 - 1,000,000 = 6,300,000. The £4.1 million represents the total value of the common equity shareholders portion of the firm's total equity capital structure.
Calculate the firm's stock price book value from the balance sheet. Divide the firm's total common stockholder's equity by the average number of common shares outstanding. For example, if the firm's total common stockholder's equity is £4.1 million and the average number of common shares outstanding is £65,000, then the stock price's book value for the firm would be £40. The equation would be 6,300,000 / 100,000 = 63. This would be based on the information obtained from the firm's balance sheet.
Things you need
- Business financial data