Formerly known as the IVM (Intrinsic Value Measure) Ratio, this is a company’s Appraisal Per Share $ divided by its most recent price. Appraisal Per Share is calculated by adding up a firm’s book value and the estimated amount and timing of future profits, then adjusting the sum downward to account for our estimate of the riskiness of the business. If the Appraisal Per Share and the stock price are the same, the Appraisal Ratio is 1.0. An Appraisal Ratio greater than 1.0 indicates that the Appraisal Per Share is higher than the stock price, and that the stock is undervalued. An Appraisal Ratio less than 1.0 indicates the stock is overvalued.
Benefit
The Appraisal Ratio, used with the Predictability measure, gives a quick intimation of whether or not a stock is overvalued or undervalued.
Origin
This figure is calculated in-house on a monthly basis using Morningstar’s proprietary model.
For the Pros
Stocks for which the Appraisal Ratio is significantly higher than 1.0 and which have high Predictability rankings may be a good place to start the search for stocks. Experienced investors, however, may find lower Predictability stocks intriguing. Because we have less information about these stocks, investors, through their own research, may be able to uncover promising stocks the market has overlooked. In any case, because of the uncertainty inherent in any model, investors should always do further research before buying any stock.