The value of this rating is an indication of the relationship between the price at which the company trades on the stock exchange and the value of (certain) assets of the company on the balance sheet. A high rating will indicate that the quote price is low relative to the value of its assets in the balance sheet. A low rating will indicate a high price in relation to this assets.
The following table can serve as a reference for the use of this rating:
|Rating value range||Interpretation|
|0 - 2||Very high company price in relatio to its assets|
|2 - 5||High company price in relatio to its assets|
|5 - 8||Company price proportional to its balance sheet assets|
|8 - 10||Low company price in relation to its assets|
In economics, the value of any asset is calculated as the discounted value of its marginal product. Or, in other words, the value of the asset will be the value it generates for the company during its lifetime, but discounted at the present time to take into account the time value of the money.
Every company is just the sum of its assets and therefore, in theory, to calculate the value of the company would suffice to calculate the value of all those assets. The problem with that it's that it's not easy to calculate this value. In most cases the value that appears in the accounts is not the actual value of the asset in the economic sense. The accounting principles for asset valuation allow for the usage of a multitude of valuation criteria (historical cost, fair value, net realizable value, current value, etc.), as well as the valuation of intangible assets such as goodwill.
Gradement uses the most prudent accounting valuation considering only the tangible assets measured at amortized historical cost. However, generally, this valuation is not the most appropriate in certain cases. There are a number of companies, mainly technological ones, whose main value lies in intangible assets and not in tangibles. That is why this rating has much less weight in the overall calculation of the price fairness rating than the other two ratings of which it is composed: the price/free cash flow rating and the price/free ernings rating.