How to estimate fair value of stock.

Just as investors like to know about a company’s growth rates, it’s also useful to know the price/Book Value ratio (P/BV). Defined simply, book value equals a company’s total assets minus its total liabilities and intangible assets. In other words, if you liquidated the company, this is what the leftover assets would be worth after paying off all creditors.

On the balance sheet, book value is represented as ‘’shareholders equity’’ – dividing this aggregate total by the number of shares outstanding will give you a per-share book value. Investors can use it to spot cases in which the market is over or undervaluing a company’s true strength.

Currently, stocks with P/BV below 1x include Kenya Re (0.2x), Co-op Bank (0.9x) and Jubilee Holdings (0.5x). Those with P/BV above Ix include Equity Bank (1.2x), Britam (1.1x) and Sanlam (1.6x).

All that said, is it true when they say that over periods of five years or more, stock prices closely track corporate profit growth? Does it hold true that the longer the stretch of time, the more important earnings trends are?

Does stock market gains come from profit growth? Do prices rise when profits add up? The simple answer is no. There is just no free lunch in the markets. So for the many (or few) valuation metrics used, the point is not to tell whether to buy or sell, they are merely a gauge to tell you whether a stock is overvalued or undervalued.

Yes, a stock’s ‘’intrinsic value’’ may be rooted in its fundamentals, but just because a stock (or sector) spots a discounted price, it does not mean a buy (and vice versa). In the end, the market will go where it feels like going.