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Discussion Thread: Valuation Factors
Stock prices are influenced by many factors, both internal and external. Together, these
factors contribute to the assessment of value for any particular company (Braeley et al., 2023). At
any given moment, supply and demand play a major role in the current price of a stock. As
consumers strive to attain the largest return possible on their investments, the stock price can also
be driven by the earnings and profitability of a company, as shown through its earnings per share
(EPS) or price-to-earnings (P/E) ratio. These metrics can be obtained from the company’s
financial statements.
When an individual purchases stock in a company, they anticipate and hope that the
company will see an increase in its future earnings. Through the company’s increased earnings,
the purchaser could also see an increase in the value of their investment (Chabachib et al., 2020).
Dividends per share can be a positive representation of the shareholder’s earnings as a company
could offer a higher dividend payout if the EPS grows to a favorable amount. This would be a
great benefit to investors. Additionally, determining whether a company has high growth
potential is a good way to measure its worth, as well as whether or not one should invest in the
company. For example, a breakthrough in emerging technology or a unique product held by a
company are two factors that make room for growth potential. When these factors are present,
individuals might be more likely to invest in companies with such resources.
In addition to the factors discussed above, technical factors have an impact on the
valuation of a company. Overall economic growth indirectly contributes to a company’s growth
of earnings. Inflation, for example, might play a role in the price of stocks, as higher levels of
inflation lead to lower valuation multiples and vice versa (Amanda et al., 2023). Additionally,
when a particular industry as a whole produces high levels of earnings, companies within said
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industries are valued highly, assuming the industry is not being negatively affected by public
news.
Internal factors that impact a company’s value are focused around the company’s
management and corporate governance. Ultimately, company executives want to create the most
value for their stakeholders. It is important to note that stakeholders are not limited to only
shareholders but also employee personnel who help produce value within the company
(Freeman, 2023). However, poor management tactics and a lack of corporate governance could
hinder the long-term value of the company. A company with a strong board of directors and
management team that oversees operations and ensures public transparency can impact
confidence in the company’s valuation. Having good leadership and oversight could lead to more
value for stakeholders. Management decisions such as mergers and acquisitions, capital
investments, and cost-cutting measures can help bring value to a stakeholder from an investor
perspective to an internal employee perspective. Success in these areas has the potential for great
financial performance, which will benefit everyone involved - investors will have higher returns,
employees can be compensated for strong financial performance, and the company will continue
to grow overall and hopefully result in rising stock prices.
Proverbs 12:15 states, “The way of a fool is right in his own eyes, but a wise man listens
to advice.” (English Standard Bible, 2001). When determining whether or not to invest in a
particular company, the potential investor should conduct thorough research. Such research will
aid in determining not only the current value of the company but whether there is room and/or
high potential for future growth. It is crucial that in determining the value of a company, an
individual explores both internal and external factors. When judgments are made based on only
some factors, decisions are not fully informed, and the consequences can greatly impact new
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shareholders.
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References
Amanda, S. T., Akhyar, C., Ilham, R. N., & Adnan. (2023). The effect of inflation, exchange
exchange, interest rate on stock price in the transportation sub-sector, 2018-2020. Journal
of Accounting Research Utility Fiannce & Digital Assets, 1(4). DOI:
http://jaruda.org/index.php/go/article/view/54
Braeley, R. A., Myers, S. C., & Marcus, A. J. (2023). Fundamentals of corporate finance with
Connect (11th ed.). Boston, MA: McGraw-Hill.
Chahachib, M., Hersugondo, H., Septiviardi, D., & Pamungkas, I. D. (2020). The effect of
investment opportunity set and company growth on firm value: Capital structure as an
intervening variable. International Journal of Innovation, Creativity and Change, 12(11),
139-156. DOI: https://eprints2.undip.ac.id/id/eprint/2168/
English Standard Bible. (2001). Crossway Bibles.
Freeman, R.E. (2023). Managing for Stakeholders: Trade-Offs or Value Creation. In: Dmytriyev,
S.D., Freeman, R.E. (eds) R. Edward Freeman’s Selected Works on Stakeholder Theory
and Business Ethics. Issues in Business Ethics(), vol 53. Springer, Cham.
https://doi.org/10.1007/978-3-031-04564-6_15
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