There is a sense in which the price approximates an intrinsic property of the shares that you can add up or multiply by the number of shares. Each share gives you a vote in the shareholder assembly and an equal portion of the dividends. If you had all the shares, you would own the company and in principle could pay yourself as much as the company can afford in dividends.
How much the company can afford to pay in dividends in the future is basically how much net operating profit after taxes (NOPAT) the company will have.
If you have a prediction of the future NOPAT of the company, it implies a present value for the whole company and its shares assuming all of it is cashed out as dividends. It is commonly assumed that in most cases the market price of shares oscillates around a rational expectation of future NOPAT, in which case it would be a reasonable approximation to something that you can semantically multiply by the number of shares to get the overall value of the company.
This is incorrect. NOPAT refers to a company’s cash flows before mandatory debt repayments, recurring capex, and interest expenses. It’s used to compare companies without considering differences in capital structure; it is not a good measure of how much the company can afford to pay in dividends. Many companies that file for bankruptcy have positive NOPAT and yet strictly 0 equity value. You’re thinking of levered free cash flow.
I stand corrected. Although the broader point about share prices noisily approximating a discounted expected cash flow which can be added or multiplied still holds
There is a sense in which the price approximates an intrinsic property of the shares that you can add up or multiply by the number of shares. Each share gives you a vote in the shareholder assembly and an equal portion of the dividends. If you had all the shares, you would own the company and in principle could pay yourself as much as the company can afford in dividends.
How much the company can afford to pay in dividends in the future is basically how much net operating profit after taxes (NOPAT) the company will have.
If you have a prediction of the future NOPAT of the company, it implies a present value for the whole company and its shares assuming all of it is cashed out as dividends. It is commonly assumed that in most cases the market price of shares oscillates around a rational expectation of future NOPAT, in which case it would be a reasonable approximation to something that you can semantically multiply by the number of shares to get the overall value of the company.
This is incorrect. NOPAT refers to a company’s cash flows before mandatory debt repayments, recurring capex, and interest expenses. It’s used to compare companies without considering differences in capital structure; it is not a good measure of how much the company can afford to pay in dividends. Many companies that file for bankruptcy have positive NOPAT and yet strictly 0 equity value. You’re thinking of levered free cash flow.
I stand corrected. Although the broader point about share prices noisily approximating a discounted expected cash flow which can be added or multiplied still holds