Value investors has their own typical way of analyzing stocks. According to our research most valuable stock analysis idea that can used by budding value investors will be discussed below:
As a value investor, it is most important to select a fundamentally strong companies which are available at discounted price. Lets look at the parameters that helps to analyze just this.
1. P/E Ratios
Price Earning Ratio (P/E) is the starting point of value investing analysis. Earning per share (EPS) can be obtained from the balance sheet of companies financial statement. Dividing market price of share by EPS will give P/E ratio. This ratio gives an idea that at what multiples of EPS the market price of share is currently priced at. A share which has multiple of 10 as compared to another share which has multiple of 8 says that that share is certainly overpriced. As a value investor one must avoid overvalued shares.
While the price-to-earnings ratio (also known as the P/E ratio or earnings multiple) is likely one of the best-known fundamental ratios, it’s also one of the most valuable. The P/E ratio divides a stock’s share price by its earnings per share to come up with a value that represents how much investors are willing to shell out for each dollar of a company’s earnings.
But it must be noted that using P/E ratio multiple to compare companies of two different sector is not advisable.
2. Price Value to Book Value Ratio
Like in the previous ratio (P/E) where the market price is compared with EPS to compare two stocks of the same sector. Similarly in price to book value ratio, the market price of share is compared with the Net Asset of the company. The good this is that this price to book value ratio can be used to compare any two stocks (may be of different sector).
3. Debt Equity Ratio
A company which is dipped neck-deep in debt shall be avoided under all circumstances. To manage the cash flow of a company a company usually takes debt from the market, but too much debt is not acceptable. So in order to measure the debt level of a company compare it with the assets of the company. High Debt Equity ratio means company is depending too much on debt to finance its business operations. This makes that share very risky for the long term investors. Ideally debt Equity ratio shall be less than one.
4. Free Cash Flow
Free cash flow is more important for investors than the profits themselves. The way our financial statements are made a company can show huge profits but actually the net cash in hand could not be that bright. Free cash is the cash in hand after the company has made some capital investments.
5. Price Earning Growth (PEG) Ratio
Dividing P/E ratio by annual growth rate of EPS is a very valuable way to value shares. Assuming a stock has P/E ratio of 25 but its EPS growth rate is also 25% it means that ration is 1 even though the P/E ratio is 25. So we can say that the stock is not overvalued when we also consider the growth rate of the company.
These are some tools that value investors can use to their advantage. My personal favorite if PEG ratio.
Have a happy investing