Three methods to value stocks: which one to choose based on your investment strategy

In portfolio management, one of the most common dilemmas is determining whether a stock’s price reflects its true value. To resolve this question, there are three complementary approaches: nominal value, book value, and market value. Each offers a different perspective on financial solidity and investment attractiveness.

The starting point: understanding the nominal value of a share

Nominal value represents the initial issuance price of a share, calculated very simply: the company’s share capital divided by the total number of issued shares. Although it may seem an outdated concept in the equity market, it has greater relevance in fixed-income instruments such as bonds.

Practical example: A company like BUBETA S.A. with a share capital of €6,500,000 issuing 500,000 shares would have a nominal value of €13 per share.

The usefulness of nominal value is limited in stock trading because it hardly changes since its creation. However, it becomes relevant in convertible bonds, where a pre-set conversion price is established. In the 2021 issuance of IAG convertibles, for example, the price was calculated as a percentage of the historical average quotation, creating a known reference in advance for future conversions.

Accounting as a compass: net book value

The (net book value) or (value in books) is obtained by subtracting liabilities from assets and dividing the result by the total number of shares issued. This indicator is especially valued by investors following the value investing philosophy, popularized by Warren Buffett.

Calculation example: If MOYOTO S.A. has assets worth €7,500,000, liabilities of €2,410,000, and has issued 580,000 shares, its net book value would be €8.775 per share.

The strength of this method lies in its ability to identify potentially undervalued or overvalued companies by comparing the stock price with the actual equity reflected in the accounting. To illustrate, the Price/Book Value ratio (P/VC) of a gas company could be easily compared among competitors, allowing identification of which offers a better price-to-equity ratio.

However, this approach has significant limitations. Technology companies and small caps often have intangible assets that are not properly reflected in the books. Additionally, creative accounting or irregularities in records can distort actual results, making seemingly solid valuations not entirely reliable.

What the market really says: market value

Market value is the quotient obtained by dividing the market capitalization by the number of shares outstanding. It is simply the price at which the stock is traded at any given moment.

Example: OCSOB S.A., with a market capitalization of €6,940 million and 3,020,000 shares issued, has a market value of €2.298 per share.

While book value indicates “what it should be,” market value reveals “what it is.” It represents the current consensus between buyers and sellers, incorporating future expectations, political risks, interest rate changes, and macroeconomic movements.

When to use each method: practical strategies

Application of nominal value: Its current use is mainly limited to convertible bonds where it sets the redemption price. In common stocks, it has little operational application.

Application of net book value: Value investors apply this method based on a clear premise: invest if the company has a solid balance sheet, a robust business model, AND the price is below its adjusted book value. This requires three conditions to be met simultaneously, not just one or two. The P/VC ratio is especially useful for quick comparisons among competitors in the same sector, particularly in companies with well-defined tangible assets.

Application of market value: It is the daily reference for traders. It determines actual buy-sell prices, sets take-profit and stop-loss levels, and reflects current market sentiment. Limit orders are used to capitalize on expected dips or rebounds. It is important to consider that each market has specific trading hours: European exchanges typically operate from 09:00 to 17:30, while the US session runs from 15:30 to 22:00 (Spanish time), and Asia has entirely different time slots.

The pitfalls of each approach

Nominal value: Its main weakness is temporal obsolescence. Once the share is issued, this value quickly loses relevance and contributes little to investment analysis.

Net book value: It is especially inefficient for valuing tech startups with minimal tangible assets but high growth potential. It is also vulnerable to accounting manipulations that can artificially inflate balances.

Market value: It is deeply unpredictable because it incorporates multiple external factors not directly related to the company. A change in central bank monetary policy can plummet valuations without any change in fundamental business performance. Sector investment trends can irrationally inflate prices. Relevant events affecting competitors’ sales can alter the value. The economy of the country of origin may deteriorate, impacting valuations regardless of operational performance.

Comparative summary: quick reference tool

Final reflection: integrating methods

Choosing a stock should never be based on a single indicator. The nominal value provides historical context, the book value reveals financial health, and the market value offers operational reality. The best investors combine these perspectives, validating conclusions with additional ratios such as PER Price/Earnings, thorough fundamental analysis, and monitoring macroeconomic trends.

True investing skill lies in correctly interpreting which method is most relevant depending on the specific context: sector, economic cycle phase, sector volatility, and each company’s risk profile. In this way, each valuation tool becomes a strategic complement rather than an unquestionable standalone truth.