Jitta Line represents the fair price or intrinsic value of a stock, based on a business perspective. When the stock price is below the Jitta Line, it means that the stock is trading below its intrinsic value. This also means that it’s a good time to consider buying that company’s shares. On the other hand, when the stock price is above the Jitta Line, it means that the stock is trading above its intrinsic value; therefore, it might not be the right time to invest. Jitta calculates the Jitta Line using a very logical and conservative business principle, “What is the maximum price we should pay to acquire the whole company in order to break even within 10 years?”
Company A has a very stable business that consistently generates a profit of $1 million in cash every year. So if we are going to buy Company A today, the fair price would be $10 million, which allows us to get our money back within 10 years. Now let’s look at Company B, a wonderful company that can increase market share and grow its profit by 15% every year. If it generates $1 million in cash profit this year, $1.15 million next year and so on, then the fair price would be $20.3 million. We will break even by collecting our cash profit during this 10-year period. In the stock market, if Company B has 1 million outstanding shares then the earning per share would be $1 and the fair price would be $20.3 per share. Jitta takes all the company’s cash flow and assets into account when valuing the company and calculating the Jitta Line. We look deeply into the past and present business performance to estimate the growth rate we use to calculate the Jitta Line. Moreover, the Jitta Line will be updated every quarter when the company publishes its new financial statement. So you can clearly see whether the fair price of the company is increasing or decreasing based on recent business performance. If the fair price is increasing, you should hold onto that stock. With time, the intrinsic value or the Jitta Line of a wonderful company will rise higher and higher every year following business expansion and profit growth.
So when you see that the price of a wonderful company has fallen below the Jitta Line, you should seize the opportunity to “Buy a wonderful company at a fair price.”
Learn more about Jitta Line Methodology.