In the valuation of common stocks, there are reasons for transferring the net worth of a business to the earning power, which has been capitalized associated with it. However, this has resulted in many businesses being prone to many hazards. This is because most of the information that is used in the valuation is not known to the investor, thus ends up making inappropriate decisions. The valuation of shares has undergone some changes. For instance, in the past, the income statement and the balance sheet, which show the profitability and the position of the business respectively, are no longer in use as they were. They provided intrinsic values that were calculated using various comprehensive formulas and this helped in raising the eligibility of the firm for credit. Today, valuation depends on the earnings exhibit, thus creating a gulf in issues of private enterprises and rules to be followed in investments.
What has been learned
From the chapter, I have learned that with the use of the earnings exhibits in the valuation of shares, a businessperson will just be laying down his statement. He will, therefore, be forced to pick the statements of the rest of the big corporations, thus enters into a new bigger world in terms of the values of the shares. This makes him appraise his business using the results that are witnessed in the current operations in the shares market, without putting a consideration to the financial status of the business. Therefore, there is a need to analyze the balance sheets of the business before the businessman takes ant action. This will help him avoid adopting some alien ideas to his operations. He will also avoid using a twofold test for both the assets and earnings thus using a criterion that is more dependable. Lastly, he will avoid unrealistic degrees of instability in the vales of the stocks.