Finance 101

I’m dumbfounded by business leaders who don’t understand what drives the value of their companies and disappointed when this lack of understanding ends up causing them to make decisions that destroy value.

The stock price is the present value of expected future cash flows, per share.

Most middle or high school students are capable to do the math needed to value a stock after learning how to calculate the time value of money and compound interest.

Let’s use GE as an example.

Based on Google Finance, GE’s earnings (per share) last year was $1.19.  That’s down from from $1.78 two years ago, a drop of about 15% per year.

The following is an example of simple spreadsheet I use help me value GE’s stock.

I won’t describe in detail the math.  I just included it to illustrate that it’s pretty simple.  Though some of my assumptions could probably bear some explanation.  Perhaps I will cover in more detail in a later post.

The key point here, is with a few assumptions and some 8th grade math (maybe 6th grade these days) I was able to get a reasonable estimate of the stock value.  This should be a basic expectation for a business leader.  Unfortunately, it’s not.

If you have business leaders that could use a refresher on basic finance so they can drive to the right results, let me know.