Price fairness score
The Price fairness score value is an indicator of whether the listed company's share price at is a fair one, high or low in relation to the company's balance sheet, cash flows and level of profits. A high value score will indicate that the stock is cheap, while a low score will indicate that the stock is expensive and therefore not recommended as an investment as long as the stock price continues at the current level.
How to use the score
The following table can serve as a reference for the use of this score:
|Score value range||Interpretation|
|0 - 50||The stock is quoted at a price above its fair price||50 - 70||The stock is quoted at its fair price|
|70 - 100||The stock is quoted at a price below its fair price|
Stock price considerations
From an investor point of view, price, together with solvency and profitability, is one of the three main variables to take into account in any investment decision making. The main tenet of the Value Investing philosophy, which is behind many algorithms that Gradement employs for the calculation of its scores, is to invest in companies whose price is sufficiently low with respect to the calculated fair price of the company, so that we have what, in this philosophy, is called a safety margin.
This margin of safety covers the investor from this risks:
- that the future evolution of the company varies significantly with respect to its past situation used for the calculation of the scores on which we have based the investment decision
- That the company Grade do not cover some important aspect of the company from the investor point of view
A Price fairness score above 70 provides this security margin on the investment.
Price fairness score calculation
The value of this score is based on a comparison of the price at which the stock is currently quoted with the following three magnitudes: