- Ref:: Sharesight
- Title:: How to evaluate a stock
- Author:: Angela Thompson
- Year of publication:: 2021
- Category:: Blog
- Topic:: #topic.investment
- Related:: Stock Valuation
Notes from reading
- Earnings per share (EPS)
- The higher a company’s EPS, the more profitable it is considered and companies that have a track record of growing their EPS each year are highly regarded
- Price-to-earnings ratio (P/E)
- the relationship between a company’s stock price and its earnings
- giving investors a good idea of what the market is willing to pay for the company’s potential earnings
- A high P/E number generally suggests investors see high growth potential, but it is not considered a reliable standalone metric
- use P/E ratios to compare companies within the same industry or sector
- Net Tangible Assets
- useful metric for evaluating a company’s future profitability, especially in capital intensive industries
- This metric
net tangible asset per share of common stockallows investors to focus on a company’s physical assets in isolation
- Price-to-book ratio (P/B)
- gives an indicator of how fairly priced – cheap or expensive – a share is at any given time
- The book value of a company is a more conservative view of its value, as it simply looks at the difference between the balance sheet assets and balance sheet liabilities
- The P/B ratio is of particular interest to value investors who like to invest in companies with a market value less than its book value with the expectation that the market perception will turn out to be wrong
Common investment frameworks:
- consider the threat of competitors or new entrants, especially in industries vulnerable to disruption; the bargaining power of buyers or suppliers; and whether a product or service is curtailed or enhanced by the COVID-19 pandemic
- three Cs (Company, Competitors, Customers); the four Ps (Product, Price, Promotion, Placement); and SWOT analysis (Strengths, Weaknesses, Opportunities, Threats)
Keep asking and answering a set of generic questions:
- How does the company make money?
- Does this company have a competitive advantage?
- How good is the management team?
- What could go wrong?