how to judge the rate of stock on stock market as to whether it is over valued or under valued, by going through their balance sheet & profit & loss?
EPS / PE ratio has something to do with the valuation
2007-03-01 02:20:34 · 6 answers · asked by hgaunr 1 in Business & Finance ➔ Investing
I strongly recommend you read, "Security Analysis," by Benjamin Graham, the 1934 edition which is available at most major chains and/or the revised version by Sydney Cottle.
2007-03-01 04:23:03 · answer #1 · answered by OPM 7 · 1⤊ 0⤋
PE is typically the most used way. Now the S&P is trading around 17 times earnings which is a bit higher than average. The economy is weakening, corporate profits are no longer growing as fast, and the yield curve is still inverted which leads me to believe we have softer economic times ahead of us, and our stock market PE doesn't accuratly reflect that.
Corporate balance sheets, interest rates, and all economic factors should also be looked at when judging whether or not the market is under/over valued.
2007-03-01 02:38:57 · answer #2 · answered by shariff 1 · 0⤊ 0⤋
The PE ratio is just the Price of the stock over its Earnings Per Share.
Its like saying in how many years will I be paid back for buying the stock.
Example: Stock costs $ 20 and has EPS of $2 it has a PE ratio of 10. If the company passed to you the $2 every year to pay you back it would take ten years.
Making a determination of if its under/overvalued is related to how that company is doing in comparison to the industry that they are in. different industries have different PE ratio ranges.
Emerging industries and especially high tech have high PE ratios and stable mature industries have low PE ratios.
High Tech firm: Price is $ 45 and EPS is $ 0.75 it would have a PE ratio of 60. But maybe someone feels it will pay-off in the future.
2007-03-01 02:45:29 · answer #3 · answered by Ronatnyu 7 · 0⤊ 0⤋
Actually, I would say that P/E is one of the most overhyped ratios for evaluating a stock. "Price" doesn't include a debt or cash position - Enterprise Value (the market cap. minus cash and equivalents plus long-term debt) should be used instead.
Also, "Earnings" hardly gives an accurate picture of how well the company is doing, because it is highly dependent on management's accounting techniques and subject to all sorts of one-time gains and losses. The better measure to use is adjusted free cash flow. If you follow the substitutions, you should be using EV/FCF instead of P/E. Its a bit more involved, but in my opinion, the bit of extra work involved in finding it are completely worth it.
Here is an example of what I mean by the difference between earnings and free cash flow. It uses Google (GOOG) as an example... http://www.valuestockreports.com/022507.htm
BTW: Going by EV/FCF, I think the Dow is significantly overvalued.
2007-03-01 05:22:05 · answer #4 · answered by Anonymous · 0⤊ 0⤋
Don't base your investment decisions solely on valuation.
Stocks may remain overvalued/undervalued longer than you can remain solvent.
2007-03-01 08:30:21 · answer #5 · answered by Carlos G 3 · 0⤊ 0⤋
Visit this link http://www.buzzingstocks.com/in/analysis.pl?ref=netzone
2007-03-04 01:58:59 · answer #6 · answered by prabhudeva 1 · 0⤊ 0⤋