Asset play has to do with determining the relationship between a given stock and the other assets that are in the possession of the stock issuer. This may involve corporations as well as small businesses that issue stock to outside investors. Generally, asset play is understood to be a situation where the value of the stock is considered to be undervalued for some reason, in comparison or relation to the other assets that art owned by the company. Here are a couple of reasons why maintaining a balance between the worth of the stocks and the company’s assets is important.
One of the main things about determining the status of asset play is that it involves preparing a complete and true picture of the market capitalization efforts of the company. Market capitalization is simply the current value of the company, based on the number of stocks that have been issued by the corporation, and based on the current fair market value price per unit. Basically, the formula for calculating market capitalization is the number of shares in the hands of the general public multiplied by the unit cost per share. As an example, if a company has a million shares in the hands of various stockholders that are valued at $7.00 US Dollars (USD) per share, the company has a market capitalization value of $7,000,000.00 USD.
Along with evaluating the current state of the market capitalization of the company, evaluating asset play also involves the need to compare that figure to the value of the other assets of the company. There is actually no real perfect ratio between the two that a corporation should try to achieve. Still, many analysts agree that one sign of a healthy corporation is that it maintains more value in assets than in the stocks that are issued. From this perspective, a company that has more tangible value in property, buildings, and equipment than in the issued stock would be considered an excellent credit risk.
The purpose of looking into the possibility of asset play is to make sure that a situation does not exist where the stock issued by the company is being undervalued, due to inaccurate information about the current financial strength of the assets of the company. In order to determine if asset play is present and the stock is being undervalued, it is important to review and appraise the value of all the assets of the company from time to time, making sure that the inventory of assets is complete and up to date.