How much can (intrinsic) value of a business change in a year? Unless, there have been significant changes to its cash flows, growth or risk factors, an analyst would say, not much.
Now, how much can market value (price) of a business change in a year? The answer depends upon the extent of rationality prevailing in the market. If markets are efficient (are they?), the answer is not much. If there is too much fear or too much greed, the price would swing; then it becomes difficult to measure the madness.
Value of a business should change over the period; As it begins as a start-up firm, it is exposed to the growth period, then to the stable market period, and then eventually decline. At every stage, the fundamentals of the firm undergo changes, and so does its value. There could be exceptions, such as, a firm could see decline before it experiences the stable period, for instance. However, how soon a firm is exposed to these conditions depends upon both external macro economic factors and internal corporate finance decisions involving, investing, financing and dividend decisions taken by the managers. We can visit this subject some other time.
For the moment, check out the swing in the market value of equity of Havells India during the past five years:
I am amazed at the extent of swing each year, i.e. the difference between the high and low market value of equity in a year. I wonder if there were any significant decisions related to projects, financing or dividend payouts envisaged by the managers that were factored by the market; I doubt it. If we think rationally, we can figure out how crazy it is to view a business in that way.
I would like to find out the quality of investments made by managers, the financing arrangement (i.e. the way the firm is capitalized) and how the managers treat excess cash. These factors have direct impact on value drivers, i.e. cash flows, growth and risk.
Market behavior has nothing to do with the value of the firm, but influences price. Whereas, the business behavior impacts its value and eventually influences price. It is for us to decide where to invest our time and efforts.
Value of a business should change over the period; As it begins as a start-up firm, it is exposed to the growth period, then to the stable market period, and then eventually decline. At every stage, the fundamentals of the firm undergo changes, and so does its value. There could be exceptions, such as, a firm could see decline before it experiences the stable period, for instance. However, how soon a firm is exposed to these conditions depends upon both external macro economic factors and internal corporate finance decisions involving, investing, financing and dividend decisions taken by the managers. We can visit this subject some other time.
For the moment, check out the swing in the market value of equity of Havells India during the past five years:
I am amazed at the extent of swing each year, i.e. the difference between the high and low market value of equity in a year. I wonder if there were any significant decisions related to projects, financing or dividend payouts envisaged by the managers that were factored by the market; I doubt it. If we think rationally, we can figure out how crazy it is to view a business in that way.
I would like to find out the quality of investments made by managers, the financing arrangement (i.e. the way the firm is capitalized) and how the managers treat excess cash. These factors have direct impact on value drivers, i.e. cash flows, growth and risk.
Market behavior has nothing to do with the value of the firm, but influences price. Whereas, the business behavior impacts its value and eventually influences price. It is for us to decide where to invest our time and efforts.
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