John Burr Williams on what a company is worth

From How to Pick Stocks Like Warren Buffett by Timothy Vick

In 1938, John Burr Williams postulated that a company is worth no less and no more than what owners can take out of it in earnings.  You can determine what a company is worth by calculating what it can earn over its eternal lifetime and adjusting earnings for inflation and the time value of money.  If you estimate that Intel will earn $175 billion over its expected life, after adjusting for inflation and your risk tolerance, then you should be willing to pay up to $175 billion to acquire the whole company.

If Intel had 1.75 billion shares outstanding, each share must reflect the appraised value of the whole and should sell for no more than $100.

To Williams, four concepts are vital to appraising a company:

1.      You must see yourself as an owner of the business and appraise a public company as you would a private enterprise.

2.      You must estimate the company’s future earnings potential.

3.      You must determine whether future earnings will be erratic or a steady “annuity.”

4.      You must adjust the value of future earnings by the time value of your money.