How to value a company, a broad strokes approach

I've been thinking about investing reecently and the different securities you could buy
and the risks that come with each.

I believe if you don't have a solid foundation, in the time of crisis one may
falter and sell from panic and shaky fundamentals.

I also believe it is important to take in as little noise as possible, try
to focus on truth.

I'm sorry if you think what I'm saying is completely obvious

Thinking of companies like factories

	Every factory produces a product from raw materials
	It costs money to run the factory, but the factory makes money
	selling the products. For one year your

	Net profit = (Money from selling) - (Operating costs)

	Each company also has some assets. Maybe they have some
	money in a bank account, some machines, some vehicles, maybe
	they own the land and building they operate on.

	Each company might also owe some people things, call these liabilities.
	For example maybe the company has recieved product from others but not yet paid.
	And even though I'm opposed to personal debt, the company maybe has
	borrowed money and will need to repay in the future.

	Net assets = (total assets) - (total liabilities)

	Say we have a factory that has $100,000 in assets and $25,000 in liabilities
	this company also produces 10,000 a year in Net profit, how much is the company
	worth?

	Well, it's easy to put a bottom floor on how much the company is worth

	if you could buy the entire company for $1000 you could in theory
	immediately pay off the liabilities with the cash, and have a free $75,000
	dollars and a company that produces $10,000 per year.

	So maybe then it's obvious that a company's basement price should be
	it's net assets.

	Now here's a difficult question. How much would you pay for a factory
	that produces $10,000 per year in net income assuming it in theory had
	no assets and no liabilities.

	Well if you bought the company for $10,000 at the end of the year you'd have
	Made your original investment back, and you still have this factory that
	produces $10,000 every year. Seems like a good buy. What about $20,000
	for this factory that makes $10,000 a year. A bit worse, but still a good buy
	having "earned" your principal back in two years. Now let's imagine the
	company costs 10,000,000 and it makes a 10,000 profit every year. It would take
	1000 years to make back your original investment. Is that a good buy? Not so much
	in my opinion. If your goal of investment is ending with more than
	you started with this will certainly not be a good buy.


	It's hard to say exactly where the line is, but let's arbitrarily choose
	the number 10. A company's worth when soley looking at net profit is 10x it's
	yearly profit.

	However assets must be factored in. A company with $100,000 of assets
	and no profits is still worth $100,000.

	Here's a general idea for total value of a company

	Value of company = Net assets + (Yearly profit)*10



	Also important to note, imagine if the company's earnings are increasing
	at $1000 per year every year


	Now there's some nuance to this.

	What would you rather have that $100,000 of assets in, US dollars, or
	Milling machines?
	
	Milling machines are certainly valuable to somebody but to turn a milling
	machine into a pile of US dollars costs a certain ammount of US dollars
	plus time.

	You have to find buyers, agree on prices, and rent fork lifts and trailers 
	to move these things. That's going to eat away at the "worth" of the milling
	machines.

	Same thing for land, if your land is "worth" $100,000 but there's only been one
	offer in a year at $30,000, how much is your land really worth?

	So maybe we should apply some discount factor to different items

	Say your factory's $100,000 in assets are split three ways
		$50,000 Property, plant, equipment
		$25,000 cash
		$25,000 Trademarks, patents, general IP

	Maybe PPE gets a discount factor of 0.5
	Cash gets a discount factor of 0
	Trademarks get a discount factor of 0.9

	assets = ($50,000)*0.5 + ($25,000)*1 + ($25,000)*0.1
		   = $52,500

	More research needs to be done on how exactly the value is calculated
	for these things on a company's balance sheet but needless to say, the market
	price at auction for some things may be lower than what the believed worth is