Defining the Value of an Investment

Core Concepts of Investment Valuation - Enterprise Value (EV) is a comprehensive measure of a company's total value, calculated by adding the market value of equity and total debt, then subtracting cash on hand [1][6] - Book Value represents the accounting value of a company, defined as total assets minus total liabilities, and is also known as shareholders' equity [3] - Market Value is the price agreed upon by buyers and sellers for a security at any given moment, contributing to market capitalization [4] Valuation Metrics - Price-to-Book (P/B) ratio is used to identify undervalued stocks, with a P/B ratio less than 1 indicating potential undervaluation, though other factors may influence this [2] - EV/EBITDA ratio provides a more complete valuation comparison than the traditional price-to-earnings (P/E) ratio, allowing for better comparisons across companies with different debt levels [6] - Intrinsic Value is an estimate of an investment's true worth based on fundamentals, serving as a benchmark for assessing whether a stock or bond is undervalued, overvalued, or fairly valued [7][8] Yield and Net Asset Value - Yield reflects the income earned on an investment without selling it, commonly calculated for bonds and stocks, and is influenced by price fluctuations [10][12] - Net Asset Value (NAV) is the per-share value of securities held by mutual funds and ETFs, with open-end funds traded at NAV and closed-end funds trading based on market supply and demand [13] Investment Evaluation - Using multiple valuation measurements provides a fuller picture of investment value, with context being crucial as different industries have varying normal values [14][15] - Comparing current metrics to historical values and industry averages is essential to avoid value traps, where a security appears undervalued but may reflect deteriorating business conditions [15] - Qualitative factors, such as management competence and competitive advantages, are also important in the valuation process, indicating that valuation is both an art and a science [16]