Posts
(29/1/2015 -Guide for Value Investing)
Value investing in stock markets is not a new way, Infact this form of stock market investing has been in use from many years and some of the world renowned stock market investors like Warren Buffett have already mastered the way of value investing. In India, generally people donot generally do minute stock analysis of the company
in which they want to invest, Hence it increases the risk of the investment turning bad.
Many people simply follow the analysis and recommendations of 24 hr business channels which have grown like mushrooms in last few years. Value Investing is type of stock market investing which needs very minute analysis of the stocks in which a person wants to invest. Thus If a person knows the art of doing value investing then chances of his investment turning bad becomes very remote.
There are many Stock metrics which acts input while doing value investing. Values of these stock metrics show the fundamental strength of a company. If a person is beginner in value investing then the first thing for him to understand is following 5 fundamental stock metrics for value investing:
1)Price/earning to Growth Ratio
2)Debt to Equity ratio
3)Available free cash flow
4)Price to earnings ratio
5)Price to book ratio
1) Price/earning to Growth Ratio: Price per growth ratio is one of the most important stock metric for value Investing which describes a overvalued or undervalued. One has to know the growth prospects of a company in which you want to invest. If the stock is undervalued but have high growth prospects, go ahead and invest in this company as it if not a overpriced investment but rather a value investing.
2) Debt to Equity Ratio: Different businesses need money for running and growth. Generally companies with high growth prospects have two ways to raise money for growth. It can be by raising debt using loans from banks or by raising money through the stock market route. However the ratio of amount of money taken from banks and from share markets is important. If a company has a high percentage of debt money and lesser equity infused money then refrain from such investment. If a company has above average value for Debt/equity ratio then donot invest in such company.
3) Free cash flows available: As we all know cash-is-king through out the world. In share markets one of the most important metric to analyse before investing any money in a company is the amount of free cash flow which company has after deducting all the expenses and taxes. A positive cash flow with healthy Debt/equity ratio is very important while making value based investment decision. Free available cash is very useful factor in growth of company as it helps the company in rough times, Helps in saving money while making and all-cash acquisitions. Free cash shows the liquid cash available with company which would serve the company in dry times while others with negative cash flows are bound to get bankrupt if tough times continue for couple of quarters.
4) Good Price to earnings ratio: Price to earning ratio of a stock is the most important metric which should be highly rated while declaring a stock as value stock. PE ratio is used for comparing valuations of companies and choosing the most valued and least priced company while doing value investing. A company with highest earning per share is the best from the lot. A person can deduce his own weightage formula for these 5 metrics for finalizing a rightly valued stock for investments.
5) Price/book ratio: Price to book ratio shows the willingness of investors spending for each rupee of assest the company holds. Usage of this ratio for determining the value of a stock is little tricky as getting correct value for all the tangible and non-tangible assets of a company is a very complex caluculation and can go wrong. This is not a compulsary ratio which should be analysed before making a value investing decision as many companies have high value for non-tangible assets especially the IT sector companies where IP of the company is the most important asset.
I hope by now you would be familiar about Value investing and can start working on finding a perfect weightage formula for these metrics and start taking decisions in value investing. Do remember that all the stock market greats have always been value investors and long-term players.
HAPPY VALUE INVESTING!
in which they want to invest, Hence it increases the risk of the investment turning bad.
Many people simply follow the analysis and recommendations of 24 hr business channels which have grown like mushrooms in last few years. Value Investing is type of stock market investing which needs very minute analysis of the stocks in which a person wants to invest. Thus If a person knows the art of doing value investing then chances of his investment turning bad becomes very remote.
There are many Stock metrics which acts input while doing value investing. Values of these stock metrics show the fundamental strength of a company. If a person is beginner in value investing then the first thing for him to understand is following 5 fundamental stock metrics for value investing:
1)Price/earning to Growth Ratio
2)Debt to Equity ratio
3)Available free cash flow
4)Price to earnings ratio
5)Price to book ratio
1) Price/earning to Growth Ratio: Price per growth ratio is one of the most important stock metric for value Investing which describes a overvalued or undervalued. One has to know the growth prospects of a company in which you want to invest. If the stock is undervalued but have high growth prospects, go ahead and invest in this company as it if not a overpriced investment but rather a value investing.
2) Debt to Equity Ratio: Different businesses need money for running and growth. Generally companies with high growth prospects have two ways to raise money for growth. It can be by raising debt using loans from banks or by raising money through the stock market route. However the ratio of amount of money taken from banks and from share markets is important. If a company has a high percentage of debt money and lesser equity infused money then refrain from such investment. If a company has above average value for Debt/equity ratio then donot invest in such company.
3) Free cash flows available: As we all know cash-is-king through out the world. In share markets one of the most important metric to analyse before investing any money in a company is the amount of free cash flow which company has after deducting all the expenses and taxes. A positive cash flow with healthy Debt/equity ratio is very important while making value based investment decision. Free available cash is very useful factor in growth of company as it helps the company in rough times, Helps in saving money while making and all-cash acquisitions. Free cash shows the liquid cash available with company which would serve the company in dry times while others with negative cash flows are bound to get bankrupt if tough times continue for couple of quarters.
4) Good Price to earnings ratio: Price to earning ratio of a stock is the most important metric which should be highly rated while declaring a stock as value stock. PE ratio is used for comparing valuations of companies and choosing the most valued and least priced company while doing value investing. A company with highest earning per share is the best from the lot. A person can deduce his own weightage formula for these 5 metrics for finalizing a rightly valued stock for investments.
5) Price/book ratio: Price to book ratio shows the willingness of investors spending for each rupee of assest the company holds. Usage of this ratio for determining the value of a stock is little tricky as getting correct value for all the tangible and non-tangible assets of a company is a very complex caluculation and can go wrong. This is not a compulsary ratio which should be analysed before making a value investing decision as many companies have high value for non-tangible assets especially the IT sector companies where IP of the company is the most important asset.
I hope by now you would be familiar about Value investing and can start working on finding a perfect weightage formula for these metrics and start taking decisions in value investing. Do remember that all the stock market greats have always been value investors and long-term players.
HAPPY VALUE INVESTING!
No comments:
Post a Comment