If a company has $80 million in equity and $20 million in debt, this means that total firm value = D + E = $100 million.
Am I then right to assume that if there are 1 million shares outstanding, then each share is worth $100? Or, do I have to subtract the $20 million debt from the equity, leaving the firm value to be $60 million, then each share is worth $60?
Can someone please help me out? Thanks.
There is no formula for calculating a stock price based on the financials of a company. A stock price is set by the market and always has a component built into it that is based on something outside of the current valuation of a company using its financials.
Essentially, the stock price of a company per share is whatever the best price it can get on the open market.
If you are looking at how to evaluate if a stock is a good value at the current price, then look at some of the answers, but I wanted to answer this based on the way you phrased the question.
Adding assets (things owned) and liabilities (debt) never gives you anything useful. The value of a company is its assets (including equity) minus its liabilities (including debt).
However this is a purely theoretical calculation. In the real world things are much more complicated, and this isn't going to give you a good idea of much a company's shares are worth in the real world
I'll give you my quick and dirty way to value a company:
A quick and dirty valuation could be: equity + 10 times profit. This quick way protects you from investing in companies in debt, or losing money.
To go more in-depth you need to assess future profit, etc.
I recommend the book from Mary Buffett about Warren Buffett's investing style.
