How to Evaluate Capital Stocks of a Corporation

by Walter Johnson

The phrase capital stock can refer to the outstanding shares of a specific firm, but it can also refer to what underlies those shares. Underlying the share price of a firm or sector should include—but does not always include—such things as investment, sales, productivity, efficiency and various forms of expansion. The distinction between the market and book value of the capital stock is important. If the market value of the stock does not match the actual performance of the firm, then the stock's value is false.

1. Compare the book value and market value of the stock over time. Evaluating capital stock is about seeing how the stock price matches up to the actual productive capacity and history of the firm. The book value of capital refers to the price of production outside of present market forces. Stock price can go up because of trends in the sector, positive media coverage, or the herd mentality of investors. This might or might not reflect a firm that is truly healthy and efficient.

2. Look at the investment history of the firm. If the firm is constantly investing in labor-saving technology and expanding its plants and machinery, then the capital stock is more than likely valued properly. With all other things being equal, such a stock should be continually rising. The point to keep in mind is that the price of a stock should always remain close to the actual health of a firm. In many cases, ignoring media treatment of different firms or trends might help you get a more objective picture of the state of a company's capital stock, as well as its present and future condition.

3. Research the nature of the capital that is represented by a company's outstanding stock. While its stock might look good and stable for the moment, this can change rapidly. Always keep in mind that there are many variables that affect prices of stocks that have nothing to do with the present health of the company. Therefore, merely keeping track of stock prices on the market only tell you part of the story.