How do you know what a company's fair value is?

One never knows exactly. It is an estimate based on normalised earnings, cash flows, return on invested capital and qualitative factors. The goal is a reasonable range, not a precise figure.

What if the market never reaches fair value?

Either the analysis was incorrect and the valuation needs to be revised, or the market remains uninterested in the company. In the latter case, the company can still create value through buybacks, dividends or acquisitions. The investment thesis should always be reviewed if the price is not moving.

Can fair value change quickly?

Yes, if fundamentals change. A structural shift in the competitive landscape, a value-destroying acquisition or a regulatory change can quickly affect what a company is worth. That is why holdings are monitored continuously, not just at the time of purchase.

Glossary

Fair value

An estimate of what a stock is actually worth. Not what the market believes today, but what the company is worth based on its fundamentals.

What it is

The company's value, not the market's opinion

Fair value, or intrinsic value, is an estimate of what a company is truly worth regardless of its current share price. It is an analysis grounded in the company's ability to generate cash flows, its earnings level under normal conditions and the quality of its business model. The value is never an exact figure. It is a range, a reasonable estimate based on the best available information. The market may have a completely different view, and often does. But it is precisely in the gap between market price and fair value that investment opportunities exist.

Normalised earnings: Temporary factors are adjusted for to calculate what the company can earn under normal conditions, not during an exceptionally good or bad period.
Cash flow analysis: Reported earnings can be manipulated. Free cash flow is harder to hide. It forms the basis of the valuation alongside return on invested capital.
Quality premium: Companies with strong competitive advantages, high returns on capital and predictable cash flows deserve a higher valuation. This is reflected in a higher fair value estimate.

In practice

The starting point for every decision

Before discussing whether to buy a company, a fair value estimate should be established. That value is the starting point of the analysis, not the conclusion. Valuations are updated continuously as new information comes in. A quarter of strong results can raise the fair value. A deteriorating competitive position can lower it. The market does not always know until later. When the share price is sufficiently below fair value, it is time to buy. When it trades close to or above fair value, one waits.

“Returns should come from the company's earnings, not from the next buyer's optimism.”

Amos Fonder

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Common questions about fair value

Related concepts

Glossary

GARP

Growth at a Reasonable Price. The strategy that refuses to choose between growth and value, seeking the best of both.

Swedish equity fund

An equity fund that primarily invests in Swedish listed companies. Amos Value is a Swedish equity fund with a mandate to hold at least 80 percent in Sweden.

Value fund

A fund that systematically looks for companies trading below their true value. But value is about more than just low multiples.

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