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:
“It would be disingenuous, however, not to point out that some things are considered as morally certain, that is, as having sufficient certainty for application to ordinary life, even though they may be uncertain in relation to the absolute power of God.”
—René Descartes (1596–1650)
“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)
“The receipt to make a speaker, and an applauded one too, is short and easy.—Take of common sense quantum sufficit, add a little application to the rules and orders of the House, throw obvious thoughts in a new light, and make up the whole with a large quantity of purity, correctness, and elegancy of style.”
—Philip Dormer Stanhope, 4th Earl Chesterfield (1694–1773)