Application
To apply this approach to a buy-sell decision, each company’s relative Graham value (RGV) can be determined by dividing the stock’s intrinsic value V* by its current price P:
An RGV of less than one indicates an overvalued stock and should not be bought, while an RGV of greater than one indicates an undervalued stock and should be bought.
Because of the measures it uses, difficulties may be encountered in evaluating both new and small company stocks using this model as well as any stock with inconsistent EPS growth. On one hand, it is efficient because of its simplicity but on the other, it is limited by its simplicity because the model does not work well for every stock.
Thus, the calculation is subjective when considered on its own. It should never be used in isolation; the investor must take into account other factors such as:
- Net Current Asset Value in order to determine the financial viability of the firm in question
- Current Asset Value in order to determine short-term financial viability of the firm
- Debt to equity ratio
- Quality of the Current Assets.
Read more about this topic: Benjamin Graham Formula
Famous quotes containing the word application:
“I think that a young state, like a young virgin, should modestly stay at home, and wait the application of suitors for an alliance with her; and not run about offering her amity to all the world; and hazarding their refusal.... Our virgin is a jolly one; and tho at present not very rich, will in time be a great fortune, and where she has a favorable predisposition, it seems to me well worth cultivating.”
—Benjamin Franklin (1706–1790)
“I conceive that the leading characteristic of the nineteenth century has been the rapid growth of the scientific spirit, the consequent application of scientific methods of investigation to all the problems with which the human mind is occupied, and the correlative rejection of traditional beliefs which have proved their incompetence to bear such investigation.”
—Thomas Henry Huxley (1825–95)
“It is known that Whistler when asked how long it took him to paint one of his “nocturnes” answered: “All of my life.” With the same rigor he could have said that all of the centuries that preceded the moment when he painted were necessary. From that correct application of the law of causality it follows that the slightest event presupposes the inconceivable universe and, conversely, that the universe needs even the slightest of events.”
—Jorge Luis Borges (1899–1986)