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Three Types Of Value That Can Be Found In The Market: Part Three

After investing in the stock market for more than a decade and having interviewed many great investors in Asia, I realised that most of the value that we can find in the stock market can be grouped into three main segments. They are:

1. Asset Value

2. Current Earnings Value

3. Growth Value

Previously, we looked at Asset Value and Current Earnings Value. Now, let’s take a look at how we can find companies with “Growth Value” in the market.

It’s All About The Future

Growth value can be found in fast growing companies. These companies might have very little assets or current earnings compared to its market value. This is because the potential of the company comes from what its earnings and cash flow can be in the future.

Companies that have growth value might be a new company just starting out or it could be a business in a high-growth industry. On top of that, it could also be a disruptor in an industry where its success could potentially change how the industry operates.

A typical method of valuing such companies might be the forward price-to-earnings (P/E) ratio or discounted cash flow method.

The Disadvantages

However, there are many disadvantages associated with using this method to find value in the market. For one, investors would need to make numerous assumptions on the companies. These might include estimating its profit margin and cash flow that can be generated in the future. And as we all know, the future is always unpredictable.

Foolish Summary

Most value that can be found in the market can be segmented into three main groups – asset value, current earnings value and growth value. Companies that are fast growing could possess growth value for investors. However, as the future is always unknown to us, it is very difficult to accurately find good investments that have growth value in them.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.