Stock analysis is a major challenge for value investors. Although, investors believe that focusing on the rudiments rules that governs investing is one sure way of getting a return on their investment.
This is the reason an investor should pay keen attention to the metrics that matters. These fundamental metrics are proven over time have served guide for investors.
You cannot afford to overlook these fundamentals; they help you reveal the company’s health.
The major constituent of a company health is the financial and operational data. This will give you the required information you need as an investor to disregard the stocks that are trading less than their value.
As a value investor before taking the decision to invest in any company, measure these 5 fundamental metrics:
This is also as also called price to earning ratio. It’s one of the basic indicator you need know and it is the most valuable.
Follow this formula to get the earning multiples of any organisation:
To get the P/E Ratio, you should divide the stock’s share price by its earnings per share. The value you get represents how much an investor is willing to shell out for each dollar of a company’s earnings.
You should be careful when trying to arrive at this value; because it is not obtainable when an investor is trying to compare different industries.
While the earning multiples speak of what Investors often use to this predict the future earnings per share, the market-to-book ratio reveals something different.
Also known as price to book ratio (P/B), the market-to-book value is always located on the balance sheet. It measures the market price of a company in relation to what it has in the book.
The ratio reveals how much equity investors are paying for each dollar in net assets. You can arrive at (P/B) value by dividing the stock’s share price by its net assets.
Kindly note that intangible assets must be taken into consideration when carrying out this measurement. This enables the to be investor arrive at the value shareholders are paying for real tangible assets.
An investors need to know how a company finances all its assets. It tells the investor the financial ratio indicating the relative proportion for the shareholders and the debt used to finance the company’s asset.
This is also called Debt-to-equity ratio. An investor needs to pay keen attention to balance sheet to get this information. It tells the investor the capital being contributed by creditors and the capital contributed by shareholders. The investor also gets to know the extent to which the shareholders equity can fulfil a company’s obligation.
To get the Debt-to-equity ratio; divide the total debt of the company with the total equity of the company.
Free Cash Flow
“The life of all flesh is in the blood.”
This general saying is the same for any business or investment.
An investor needs to evaluate the level of free cash flow before taking any investment decision.
What is free cash flow?
This is the money that a company is able to raise after the required spending to maintain or expand its asset base.
You need this information because it tells you how much cash a company is left with after expending cash on capital investment.
The PEG ratio is an acronym for price/earnings to growth ratio. And it is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company’s expected growth. In general, the P/E ratio is higher for a company with a higher growth rate.
It is used determine a stock’s value while taking the company’s earnings growth into account. The PEG ratio is provides a more complete picture than the P/E ratio.
Read more about the PEG ratio.
These five metrics are basic for anyone who want to invest in a company stock. They are proven path follow them.