Three ways to value a stock: Which one to use according to your strategy

When we look at a stock, we see a price. But that price is not the only truth. There are three completely different ways to view the same value: the market price we pay, the book value according to the company’s accounting records, and the original issuance point. Understanding the difference is what separates investors who know what they are buying from those who only see numbers on the screen.

The investor’s dilemma: Which valuation should you believe?

Imagine you want to buy shares of a gas company. You see one trading at 1.2 times its book value and another at 1.8 times. Which one should you choose? It all depends on which of these three valuation methods you use to make your decision. And here’s the problem: all three will give you different answers.

Understanding the three valuation metrics

Nominal value: The forgotten starting point

It’s the simplest: divide the company’s share capital by the total number of shares issued. A company with €6.5 million in capital and 500,000 shares has a nominal value of €13 per share.

Why does it hardly matter? Because it’s fixed at the time of issuance and then remains frozen. It is rarely used in equity investing. In convertible bonds, it is relevant when setting the price at which you can exchange debt for new shares of the company.

Book value: What accounting says

Take what the company owns (assets) minus what it owes (liabilities), and divide it by all the shares. If a company has €7.5 million in assets, €2.41 million in liabilities, and 580,000 shares, its book value is €8.77 per share.

This number is very interesting to value investors. If the market price is below, the stock could be undervalued. If it’s much higher, it might be overvalued. But here’s a trap: in tech companies and small caps, the book value can be misleading. And accounting tricks can distort it.

Market value: What you actually pay

It’s what you see on your screen every second. Divide the total market capitalization by the number of shares. If a company is worth €6,940 million on the stock market and has 3.02 million shares, each share is worth €2.30.

This price is purely the result of supply and demand. It’s what matters if you are buying or selling today. But it doesn’t tell you if it’s expensive or cheap, only how much it costs.

When to use each in your decisions

Nominal value in accounting: Only in very specific contexts. If you invest in convertible bonds or insurance, you need to know the pre-established conversion price. For common stocks, forget it.

Book value as a screening filter: Use it when practicing value investing. Compare the Price/Book ratio among companies in the same sector. If one gas company trades at 0.9 times its book value and another at 1.5, the first is cheaper relative to its balance sheet. But this is just a first filter, not the final decision.

In the real example: ENAGAS has a lower P/B than NATURGY. That suggests ENAGAS offers better value on the books. However, you should review the quality of the balance sheet, profitability, and other ratios before investing.

Market value for trading: It’s your daily guide. If you believe META PLATFORMS will fall further, you can place a limit buy order at €109 when it closes at €113. It will only execute if the price drops to your level. This is the value that moves your real money.

Remember that stocks have trading hours according to the market: Spain and Europe from 09:00 to 17:30, US from 15:30 to 22:00. Outside these hours, only pre-set orders work.

The traps of each method

Nominal value is almost useless for equity investing. It’s a ghost of the past of the stock.

Book value doesn’t work well with tech companies because it doesn’t capture the true value of intangible assets. Additionally, creative accounting can deceive you. A company can manipulate its numbers to make the book value look more attractive than it really is.

Market value is subject to factors unrelated to the company’s actual situation. Rising interest rates, changes in economic expectations, irrational sector euphoria: all push the price. Often, the market discounts information that isn’t 100% accurate or overvalues relevant facts. The result is a price that distorts financial reality.

The formula of the intelligent investor

Don’t rely on just one method. Combine all three as complementary tools:

The nominal value from accounting will only appear in very specific cases. The book value provides context on whether the current price makes sense according to the books. The market value is where you actually put your money.

A good investor looks at the market price, compares it with the book value, reviews multiple ratios, analyzes the balance sheet, and then decides whether to buy, sell, or wait. None of these values alone will give you the full truth. But together, they get you quite close.