Question

Analysts use both asset valuation and future sales growth as indicators of current stock values. Describe completely which method you believe provides a more reliable indication of future value, include in your discussion examples provided in class to enhance your response. Indicate the importance of the types of assets that appear on the financial statements as indicators of future value and the problem with off-balance sheet financing as an impediment to realistic valuation.

Answer 1

Ans: The best method for calculation of future value of a stock would definitely be assets valuation method. because using future sales growth method does not provide the reliable valuation results since in sales growth method (sales growth propels better earnings) there will not be much control to drive the bottom line (net profit) due to many external factors which are not in control such as taxes, interests, other expenditures. Hence the reliability of the result attained through sales growth factor is questionable. SO the best method would be assets valuation where the assets valuation provides certain results with effective control over the result. Assets such as Current assets Cash in hand, Cash in Bank, marketable securities are to be considered for valuation. These are the assets that propels quick cash and a company with higher cash will have better prospects.

The problem with off balance sheet financing is that they don’t appear on balance sheet means they will not be shown as liability but in the fact they are liability and thus they are very mysterious in the sense that they did not allow to have a correct debt equity ratio which is very important factors in deciding future value of any stock hence off balance sheet financing prevents real valuation of stock.