RSS feedAs I said, we’re just going to go through basics. Nothing crazy like doing our own valuations and using discounted cash flows or reading annual reports and analyzing income statements and balance sheets. For individual investors, we likely don’t have the time to do so or won’t do it better than institutional guys who publish their work online anyway. Today, we’re going to go over some basic valuation measures and what they might mean to you when you invest. These are the measures freely available at Yahoo!Finance when you look up a stock symbol then click “Key Statistics” on the left menu bar. The data is all provided by CapitalIQ which is the financial research and analysis division of Standard & Poors (a pretty good source if you ask me).
So, the measures you see here are Market Cap, Enterprise Value, Trailing P/E, Forward P/E, PEG ratio, Price/Sales, Price/Book, Enterprise Value/Revenue, and Enterprise Value/EBITDA. These valuation measures can tell us a lot about a company’s performance and more importantly how this relates to the price of the stock we are thinking about buying. After explaining the general meaning of them in this post, I do hope to continue with a more in depth look at how exactly to use these metrics when analyzing a stock. So, let’s get started!
Market Cap is simply the share price multiplied by the shares outstanding to give you the total amount of money the company is worth if you were to try to acquire it by purchasing 100% of the shares in that company. Enterprise Value is another measure of how much a company is “worth” which is market capitalization + debt + minority interests or preferred shares - cash on hand. To some degree, this is a “more accurate” valuation of a company.
Now, the rest of the metrics displayed are ratios that have been developed to help you get a quick look at fundamental properties in a scaled manner (presumably allowing you to compare one stock to another since these ratios for the most part tend to be of the same general magnitude from stock to stock). Essentially, they are each designed in some way to show you how much you spend on a stock per dollar that the company earns. If you think about it from the prospective that you will be a part owner of this company (hypothetically also entitled to a portion of company earnings), then it makes sense that the decision to buy a stock is ultimately based on what you are paying for earnings. For the most part, lower is better, but too low is often a sign that something is fundamentally wrong with the company. As we go further into this series we’ll discuss more accurate methods of using these ratios to analyze potential stock picks.
We’ve talked about Price to Earnings ratios in the first introduction to reading a stock chart. Price-to-Sales is a measure of the price of the stock divided by the dollar amount of sales/revenues per share outstanding. Price-to-Book is a measure of share price divided by the book value of the company per share. Book value is a computed as total assets minus liabilities which is essentially another measure of what a company is worth from the perspective of someone who already owns the company as opposed to someone who would like to take it over (as is the case with market cap and enterprise value). PEG Ratio is defined as the price to earnings ratio divided by the annual growth rate. This is a pretty primitive ratio designed to help you take growth rate into account, but in my opinion has no real mathematical meaning and you might be better off looking at P/E and growth rate seperately and making your own decisions. I am in the process of trying to devise a better way to combine the two metrics that has more true meaning, and if anyone has any ideas do comment!
Finally, we have two last ratios Enterprise Value/Revenue and Enterprise Value/EBITDA. Both of these ratios attempt to give you an idea of how good the company is at earning money. It’s a comparison of how large a company is versus how much money it makes each year. Revenue is simply how much income a company has and EBITDA is defined as Earnings Before Interest, Taxes, Depreciation, and Amoritization. The first, if you ask me, is the more “honest” ratio as it is very simple. EBITDA is a quasi-metric of profitability and can often be skewed depending on the way earnings are reported and the method used to calculate it.
