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Financial Accounting, Ch. 11: Reporting and Analyzing Stockholders’ Equity How can companies control the value of...

Financial Accounting, Ch. 11: Reporting and Analyzing Stockholders’ Equity

How can companies control the value of their stock?

What are some methods that investors can use to determine if a corporation is worth investing in?

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Expert Solution

The value of the company is measured by its market cap. Market cap is the product of the share price and the number of shares outstanding.
Although, both the creterias are to be determined by the company, there are many factors that go for determining these.
The share price is decided by many factors :
1. Demand and supply - determined by buyers and sellers in the market (similar to law of economics)
2. Sudden change or temporary change in price - political events, dividend declaration, earnings report etc.
3. Performance - measured by numbers example- EPS, ROA, ROE, Financial statements, Liquidity ratios, Leverage ratios etc.
4. Beyond numbers is the "herd instinct"- also known as behavioural instict to follow the peers in society.
In each of the points mentioned above, the company can pro-actively act and be a market leader and take it to its stride.
Like-wise, every prudent investor analyses the company before investing in it.
It may be done systematically as follows :
1. Fundamental Stock Analysis : Using the financials, evaluate its EPS, growth rate, potential earnings, hidden weakness if any.
2. Market Analysis : The health of the industry concerned and its volatality
3. Technical stock Analysis : Using the daily, weekly, monthly reports and using the statistical tools.
4. Historical Preceedent Analysis
5. Recent trends in stock market
6. Further study if needed- using the statistical measures like NPV , Pay back period etc.,
After all these routine checks, one has to be cautious in investing in those companies in which the investor has not understood them well.

ekkarill92 answered 3 years ago
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