The best financial ratios for investors involve a stock market analysis factoring in both objective and subjective values when calculating the value of a stock and the total value of the company. Investors need to consider the worst-case scenario, while factoring in the human emotions that often affect common stock prices and, ultimately, the market value of companies in stock market exchanges.
You understand how to calculate the original price per share of a company's stock using numbers available in financial statements, such as balance sheets. You can use the value in other valuation metrics and to help determine when to sell your shares.
Objective vs. Subject Valuation Metrics
It would be wise to use various valuation metrics for stocks to gain a better understanding of their true and perceived values. For example, you could opt for the book value per share, which you can then use to calculate the price-to-book ratio.
You can obtain that value by dividing the stockholders’ equity or shareholders’ equity (minus preferred stock) by the number of shares outstanding. According to Oklahoma State University, the first value is based on what remains after all the liabilities have been deducted from a company’s total assets. The ratio is very objective and pretty conservative.
Dividend Payout Ratio
The dividend payout ratio (DPR) is also objective. It compares the dividends paid out to stockholders to the net income a company generates. So, it’s all about dividend and revenue numbers.
On the other hand, the market value per share is equal to a company’s total market value divided by the number of outstanding shares (total number of shares in the hands of shareholders). It represents the current market price per share of a particular stock at the time you want to invest in it. Usually, the market price of the company is highly subjective since it can fluctuate based on the whims of the stock market investors, some of whom tend to buy and sell in panic.
However, you can get better insight into the company’s performance using the price-to-earnings ratio (P/E ratio). Auburn University explains this ratio compares the company’s subjective share price to the earnings per share (EPS). Since EPS is obtained by dividing net income by common shares outstanding, it takes some of the emotions out of the equation, making the stock valuation metric more objective.
What Is Original Price Per Share?
Over time, company stocks may undergo processes like splits, buy-backs and reissues. Reissues and splits are likely to dilute the price of each share, thus reducing your stake in the company and possibly lowering your share value. However, companies may buy back some shares of their company stock to mitigate dilution.
As a result of these kinds of stock market moves, it may be difficult to determine which price of a stock to use, especially if dilution has occurred, to calculate capital appreciation. That is why you need to learn how to perform original price per share calculations.
Remember, there is no specific price per share formula you may be able to use. But there are strategies you can implement to come up with the original purchase price per share.
Using IPO Prices
If you purchased company stock during the initial public offering, there is no need to calculate anything. The Securities and Exchange Commission notes that the price of the stock, when the company first issued shares to the public, represents the original price per share. So, you can take a look at your stock trading account or physical stock records.
Alternatively, you can read media reports concerning a company’s IPO to determine the original share price even if you did not buy the stock at that time.
If you did not purchase a company stock during the IPO, you must calculate it by reverse engineering your current share price numbers using the steps below.
Find Current Market Cap
Determine the outstanding shares and multiply them by the current market price per share.
For example, if Flowers Inc. is currently trading at $5.50 and has 1 million outstanding shares, its market value is:
$5.50 * 1 million = $5.5 million.
Find Second Offering Market Cap
Determine the number of shares sold during the second offering and multiply it by the share price at the time.
So, if Flower Inc.’s second offering involved 200,000 shares sold at $3.50, the shares would have a market value of:
$3.50 * 200,000 = $700,000.
Find the Outstanding Shares Before Second Offering
You can determine the number of shares outstanding before the second offering by subtracting the shares offered the second time from the current shares outstanding.
In this case, 1 million shares - 200,000 shares = 800,000 shares.
Then, repeat the process for all the offerings that were made.
Find the Capital Difference
Subtract the capital the company raised during the second offering from its current market value.
In this case:
$5.5 million - $700,000 = $4.8 million.
Find the Original Price Per Share
Finally, divide the difference by the outstanding shares before the second offering.
In this case:
$4.8 million/800,000 shares = $6 per share
Therefore, $6 is the estimated original price per share before they were diluted.
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