Accounting wise, apparently it depends on how you calculate it. All the hype about the ‘Mark to market accounting’, which is the accused culprit of our current financial crisis. Well again, of course nobody made a mistake in dealing their business. It’s all about accounting. Right? Wrong!
Mark to market accounting, or also known as fair value accounting requires a close look at the risks in order to assess value. Did the trouble banks and financial institution looking closely at the risks? If institutions were accurately marking the books, they would have seen the problems they were experiencing months in advance and could have made the necessary adjustments, and we could have avoided the current crisis
Anyway, on the new development of this issue, Accounting bodies in the US and Europe responded by changing a few rules.
The International Accounting Standards Board (IASB) has confirmed a change to its rules allowing some assets to be reclassified and avoid be subject to a fair value calculation. The changes allow some assets to be moved from ‘held for sale’ or trade, which means using a fair value calculation, to ‘held for investment’ which does not. Deutsche Bank took advantage of new accounting rules, and shifted the income statement into a profit instead of a loss
SEC and the Financial Accounting Standards Board issued a clarification of the rules to say that “when an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.” It added that “the results of disorderly transactions are not determinative when measuring fair value,” which could mollify concerns about assets being marked down to fire-sale prices.
Whatever the accounting bodies decide, I hope it’s for the interest of everybody, especially investor, and I am not going into detail about the issue in this post.
Now, Back to the question: What is a value of the stock?
In accounting, there are several alternative in valuing the stock: It might be slightly different in some textbook, but basically one of the well known methods is a discounted cash flow (DCF)..
How does DCF analysis work? In simple terms a business is worth the present value of the cash flows that it will generate into the future. Those are the after tax cash flows available to shareholders – from today to forever. To calculate the after tax cash flows available to shareholders you will start with the revenues a business generates and deduct all the cash-based expenses that are incurred in obtaining those revenues (including taxes and capital expenditures).
Most corporate finance professionals are using this method.
However, apparently, Citigroup analysts have recently shifted from a discounted cash flow model of valuation to an enterprise value model.
The Enterprise value (EV) represents a company's economic value -- the MINIMUM amount someone would have to pay to buy it outright. An enterprise value model adds up the market cap and debt a company has, and then subtracts cash and cash equivalents.
Using an enterprise value model for a company shares could means, well, the end of the business itself. It means the analysts thinks that the company has a zero earning power, hence kaput!!
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