Sunday, 1 April 2012

FA Valuation?

In FA, there are many ways to value a stock. P/B, P/E, cash return, DCF etc. Some investors also look at things like net debt/net cash, free cash flow, ROE, ROA, dividend payout ratio, EPS growth rate etc for the financial health of the company and the total return of money to investors. Some also look at economic moats of the companies business, managers, CEOs of the companies for the qualitative aspects. Personally, I kept one excel sheet to keep my calculation of these terms simpler. I am lazy to press calculator everytime. Haha!

Regardless of which method you use, its important to understand the meaning of these terms and acknowledge the fact that these are "tools" to help you and they are not the "holy grail" to investment success.  Personally,  I believe emotion is the hardest to manage.

Let me introduce some of these terms:

 P/B ratio, I guess many have heard of this ratio before. Anyway, this is one way of valuation of stock to see if you are paying a premium to its book value.

 What is price to book ratio?

A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Book value is basically net tangible asset value which is total assets - intangible assets - total liabilities. This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.

Good read below:
 Enterprise value
A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash. 

Some use FCF/enterprise value to see if the companies are generating good FCF from its enterprise value. 
FCF = free cashflow = net cashflow from operations - capex 

(Credits to investopedia for the definition of these terms)


Singapore Man Of Leisure said...


What you say about emotion and tool is very true.

Buying a stock and buying a majority control of a company are two different things altogether.

That's why in M&A, the acquirer has to "overpay" in order to compensate the seller the emotion of losing their "prized baby".

Similarly, in a cash crunch situation, vulture capitalists can pick up good assets at 50 cents on the dollar if they know the seller is "desperate".

It sort of put a new spin on FA ;) Numbers are numbers. It's how to read beyond the numbers that separate the men from the boys.

I wish I am more of a man :(

Createwealth8888 said...

What separate the men from the boys?

Size of their balls!!! LOL

Make Money Online said...

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Market Strategist said...

Any indicator that does not pay into the attention of growth is not very useful. For example a stock can be trading at a PE of 3x, but if the growth rate is negative, that stock is still a bad stock to invest.

OT83 said...

Hi SMOL and CW,

I also hope to be a man :)

Hi Market Strategist,

Thanks for visit. Yup. That's why there are many things to see before investing.

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