Best Way to determine how much a company is undervalued

thats not that simple of a question. one way, however, is to look at what the company would make if it sold everything and payed out all other obligations.

Why wouldnt you just do a comp analysis of its industry peers? There are only so many ways to value a company, all of which provide quick and dirty estimates.

Public comps, transactions comps or DCF

liquidation value is a pretty poor proxy for the ongoing value of a company as it is likely a lot lower than its true value as its assets would be sold at fire prices.

comps are the best way. look at multiples (EV/09 consensus EBITDA, P/E, etc). if its peer group trades at 7x and the company trades at 6.0x, you need to determine if its undervalued or if there is a reason it should trade at a discount (slower growth, lower profitability, etc)

In the example of Caribou Coffee, a company I am researching, they actually don't list he P/E ratio

ev/ebitda is better in my opinion as earnings can be full of a lot of "junk" that isnt true earnings ie non cash items. if you can get onto a bloomberg, you can get consensus 2009 EBITDA estimates, if not im sure they are out there somewhere.

and sorry to insult you if you know this but EV= market cap (# shares outstanding * share price) + net debt (total debt-cash)

hope that helps

comps can strongly reflect market sentiment, so in a lot of cases it can't provide much insight

of DCF models i've looked at, i like CFROI. it seems to most reasonably model a lot of key variables better than some of the other models that look mathematically elegant but explain reality poorly (ie, most quick and dirty models).

also, accounting effects deserve strong consideration

Let what you think the shares are worth = x
Let current price = y

Upside = x / y - 1
Discount = 1 - y / x

What you think the shares are worth is a whole other question.

UHH That is because their 2007 actual earnings is negative, and analysts' estimates for future earnings is negative as well.

In this case, you should use EV/EBITDA.

And take a closer look at your company. And your Finance textbooks as well.

If fair value estimate is 5 and price is around 2.8 would that make it undervalued by 55%?

1 - 2.8 / 5 = 44% discount

I think valuation comps can provide plenty of insight. To account for current market sentiment, you would need to look at comps over time to see how things are trending.

Companies tend to directionally track their peer group over time so a divergence in comps can indicate material changes that might be worth drilling down on.