The best financial ratios for investors tend to factor in both objective and subjective values. That is because investors need to consider the worst-case scenario if their investments don’t pay off. At the same time, they need to factor in the human emotions that frequently drive activity in stock market exchanges.
For those reasons, at the very least, you need to understand how to calculate the original price per share of a company's stock. You can use the value in other valuation metrics and to help determine when to sell your shares.
Read More: Shares and Value-Based Investment Models
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 obtain by dividing the stockholders’ equity (minus preferred stock) by the number of shares outstanding. The latter 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.
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. It represents the current price of a particular stock in the market at the time you want to invest in it. And it is highly subjective since it can change based on the whims of the stock market investors, some of whom tend to buy and sell in panic.
Read More: How to Calculate the Market Price of a Stock
What Is Original Price Per Share?
Over time, company stocks may undergo processes like splits, buy-backs and re-issues. Re-issues 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 share 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 price per share.
Using IPO Prices
If you purchased company stock during the Initial Public Offering (IPO), there is no need to calculate anything. That price at which 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.
- First, determine the outstanding shares and multiply it 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 $5.5 million.
- Second, 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, those shares would have a market value of $700,000.
- And then, determine the number of shares outstanding prior to the second offering by subtracting the shares offered the second time from the current shares outstanding. In this case, you will subtract 200,000 shares from 1 million shares to get 800,000 shares.
- Repeat the calculations to cater to all the offerings made concerning the stock you are considering.
- Next, subtract the capital the company raised during the second offering from its current market value. In this case, you will subtract $700,000 from $5.5 million to get $4.8 million.
- Divide the difference by the outstanding shares before the second offering. In this case, you will divide $4.8 million by 800,000 shares. The result, which is $6, represents the estimated original price per share before they were diluted.
Read More: What Are the Benefits of an Increasing Share Price?
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