IPOs and ESOPs

IPOs (Initial public offerings) and ESOPs (Employee Share Ownership Plans) are also means of stock ownership except that the companies involved are not yet listed in a stock exchange.

This also means that unlike listed companies which must follow legal requirements for disclosure, these stocks — especially ESOPs — don't have much public data available for analysis.

For IPOs, the formulas that can be used for evaluations are the NCAV ones or, if sufficient past earnings data is available, the enterprising ones. Thus the same forms can be used for analysis of IPOs as well. Depending on the data entered, GV will let you know if the IPOs is an NCAV or Enterprising and how much you should pay for it.

ESOPs however are trickier since they have absolutely no public data available. But since they are offered to employees who have the opportunity to observe the company at a very close range, these can be analyzed using the above forms too using a little discretion and obtaining the required information from one's accounting department.

The various data points required to evaluate an ESOP are discussed below.

Book Value and Earnings per share

The two most important values in evaluating any stock are the Book Value and the Earnings Per Share.

Book Value is the value of the tangible assets, minus all debts, that you get for each share you buy.

EPS, or Earnings Per Share are the share of the company's profits that each share gets.

There are three different formulas that Graham suggests for using these to calculate a share's price.

For blue chip stocks with decades of recorded positive performance, Graham recommended that "the product of the multiplier times the ratio of price to book value equals 22.5" (or as it's more commonly known, The Graham Number - the square root of 22.5 x BV x EPS).

For less well established companies, meeting what he called the criteria for enterprising investment, the price was calculated as the lower of 120% net tangible assets, or a PE of 9.

For any other stock that has not reported losses in the last 12-month period, the price was calculated as "the applicable net current assets alone, deducting all prior claims, and counting as zero the fixed and other assets".

GV's analysis forms automate all these calculations.

You can keep editing the analysis of a stock to add more data till you are satisfied.

The thing you need to keep in mind while filling them is that the only values that are used in calculating the price of a stock are the following:

Current assets

Current liabilities

Long term debt

Shares outstanding

Book value

EPS values for the most recent three years

All the other values are only used to check how well established the company is and which formulas exactly to use for price calculation.

Current assets

Tangible assets are what the company physically owns — buildings, servers etc.

Intangible assets are things like brand names, good will etc which can also be substantial.

Current assets are cash-equivalents like inventory and accounts receivable that will be en-cashed the same year.

Non current assets like buildings and servers change every year as well, based on depreciation, new purchases etc.

Book value is basically ((tangible assets-debt)/shares outstanding).

Debt can be anything like loans, bonds or preferred shares.

Sales

if your company generates revenue from commissions on sales of a 3rd party product, the Sales figure will be the commission alone.

When in doubt, always use the safer number.

Normally sales also includes cost of raw materials but 3rd party products can't be considered raw material since raw material costs are usually smaller in proportion to sales.

Long term debt

Long term debt is anything with a payment period of over one year.

All other debts are called current liabilities.

If the money taken from investors was exchanged for normal shares, then it is not debt.

If it was exchanged for preferred shares or loans, then it has to be considered debt.

Debt is anything that has to be legally returned before shareholders receive a share of assets, in the event of a liquidation.

The amount that the shareholders "theoretically" receive in a liquidation, after returning all debts, is called the Book value per share.

Dividends

Dividends are mainly a way of measuring stability.

As an employee opting for ESOPs with more knowledge of the company than the average investor, you can take a call on this figure. You can possibly mark the dividend as paid for every year that you have received a salary.

Note that the amount is not required, only the years of payment. This is only a way of ensuring that the company is in fact making a profit and is able to pay out a part of it to its stakeholders year after year.

One factor by itself won't make much difference.

The final price is calculated based on the full combination.