Every company that is traded on the stock exchange has a price and a value. The price is relatively easy to determine – it is the current share price determined by supply and demand.
On the other hand, the value of a company is much more difficult to determine and depends on many different factors. On the one hand, it is determined from hard facts, which are usually based on key figures such as cash flow, the price-earnings ratio and many others. On the other hand, soft factors that cannot be determined from figures have an influence on the value of a company. These include, for example, the quality of the business model, the management or even competitive advantages.
Our analysts therefore spend a large part of their time getting to know potential companies in detail and analysing them down to the smallest detail in order to subsequently determine the most accurate “value” possible.
If price and value are known, the two are compared: If the price is currently lower than the value, an investment makes sense because we assume that the price will adjust to the actual value in the long term.
This difference between value and price (assuming that the value is higher than the price) is called the “safety margin” in value investing. The greater this difference, the greater this safety margin.