Three stock valuation metrics: Which one to use according to your investment strategy

When we face an action that we want to analyze, we often encounter multiple different “prices.” The market capitalization divided by shares gives us one figure, the accounting balance sheet provides another very different one, and the real-time buying and selling price presents its own value. Which one should we follow? This article breaks down the three key valuation metrics and when each truly matters in your decision-making.

How they are calculated: The sources of information behind each metric

The fundamental difference among these three valuations lies in the data we use. Understanding their origins is essential before applying them.

The starting point: nominal value

This metric is perhaps the simplest to calculate. It is obtained by dividing a company’s share capital by the total number of shares issued to the market.

Let’s consider a practical example: a company with a share capital of €6,500,000 and 500,000 shares issued would have a nominal value of €13 per share. This number represents the initial theoretical price of the share at issuance, but little more.

Accounting as a reference: net book value

This indicator shows what the company’s balance sheet says about each of its shares. It is calculated by subtracting liabilities (debts) from assets (goods and rights), and dividing the result by the number of shares issued.

Suppose a company has assets of €7,500,000, liabilities of €2,410,000, and 580,000 shares outstanding. The net book value would be €8.775 per share. This number reflects how much each share is “worth” according to the company’s accounting books.

Market reality: market value

The actual buying and selling price of a share is determined by supply and demand. It is calculated by dividing the company’s total market capitalization by its issued shares. A company with a market cap of €6.940 billion and 3,020,000 shares will have a market value of €2.298 per share.

What they reveal: The interpretation of each metric

Knowing the numbers is only half the work. It is crucial to understand what information each transmits.

Nominal value: the historical legacy

The nominal value mainly indicates where a share started. For common shares with indefinite maturity, its analytical usefulness is limited. However, this concept becomes relevant in fixed-income instruments with a defined maturity, or in convertible bonds where a predetermined redemption price is set.

Book value: the magnifying glass on corporate health

This is where value investors begin to pay attention. The net book value allows identifying whether a company is undervalued or overvalued relative to what it truly owns. By comparing the market price with the book value using the Price/Book ratio (P/VC), investors can spot opportunities.

However, this method has critical limitations: it performs poorly with tech companies loaded with intangible assets, also becomes problematic with small caps, and is vulnerable to accounting irregularities or “creative accounting.”

Market value: your daily operational compass

This is the number you see on your trading screen every second. It is what you effectively pay or receive. Trading hours vary by market: Europe trades between 09:00 and 17:30 (Spanish time), the US from 15:30 to 22:00, Japan from 02:00 to 08:00, and China from 03:30 to 09:30.

The market price determines your take-profit, stop-loss, and limit orders. If you see a stock has fallen significantly and you expect it to drop further, you can set a limit buy order at a specific price that will only execute if the market reaches that level.

The real limitations: Where each metric fails

No metric is perfect. Understanding their weaknesses is as important as knowing how to calculate them.

Nominal value: relevance expires

Its main weakness is that it quickly becomes outdated. It has little application in regular stock trading and offers little analytical value once the stock has started trading.

Book value: vulnerable to distortions

This method suffers significant inefficiencies when valuing tech startups with many intangible assets or small companies with atypical structures. Creative accounting techniques can distort the numbers without being technically illegal. Additionally, amortizations and depreciations may not reflect the current economic reality of assets.

Market value: slave to indeterminacy

The price fluctuates for reasons often unrelated to the company itself. Changes in interest rate policies, rumors about regulation, sector emotional cycles, or simply herd behavior among investors can push the price to irrational levels. The market can overinterpret positive data during euphoria and excessively punish during panic.

Comparative table: Your quick reference

In conclusion: Use context, not just the metric

A sophisticated investor does not choose a single metric. They use them together, depending on the context and objective.

If you seek intrinsic value and plan to hold stocks long-term, the book value is your starting point, always complemented by qualitative analysis of the company. If you are an active trader, the market value is your operational reality, and you must master its dynamics. The nominal value is mainly historical reference and applicable in specific instruments.

Investing requires multiple perspectives. A good valuation metric never acts alone. Combine them, cross-reference, compare with other indicators and fundamental analysis. Only then will you make decisions with well-founded confidence.