Everyone know what is value investing, by simplicity wise its all about finding the right stocks that currently experiencing below its intrinsic value.
On general terms, one would use Price-to-Book value (PB) or Price-to-Earnings (PE) as the basis of identifying the stock value worth at present moment.
Usually company that often pay dividends would have lower PE as compare to growth stocks that don’t pay dividends as part of the payout impact earnings per say.
Growth stocks (usually tech companies) would rather reinvest its earnings back to the company for further growth and expansion. Companies like Google $Alphabet(GOOG)$, $Amazon.com(AMZN)$ focus on capital appreciation to reward its shareholders while others do $Apple(AAPL)$ and $Microsoft(MSFT)$.
Measurement Tools
Price-to-Earnings Ratio
As the name suggestion, its the stock price valued at market price per share divided by earnings per share.
A simplest way of benchmarking PE would be to compare similar businesses. If such PE is low, it might indicate the stock is priced at a discount in relation to its earnings.
Price-to-Book Ratio
It relates to total market capitalisation over its book value of equity. Book value usually derive from the company’s financial standing of assets less liabilities.
It signify how much is the company perceived valued by the investors over what it would current valued at, the higher the ratio, the more pricy would the stock price be.
Discounted Cash Flow
Basically it relates to forecasting the company’s future earning capability in terms of future cash flows over a period of time discounted back to current value.
As investors usually buy in at the current stock price in anticipation that the company’s capability to generate even more revenue and better manage its cost as well its collections.
Operating Cash Flow
By looking at the company’s period to period operating cash flow, it would form ideal indicator how the company manages its day to day cash flow and whether its existing “infrastructure” is capable to manage its operational costs effectively.
Having a negative operating cash flow indicates, the company would need external funding to support it business operations and its current business lacks competitiveness.
Business industry
Different business industry requires different operational models. Business that are in manufacturing industry would require capital intensive deployment Vs business that are developing software solution which needs technical know-how to stay in tune with market demand.
Though all said and done, different investors would have different way of finding the right business to invest on.
Such approach would greatly pair with time as any business growth or knowledge application, it take the first step of planting the seed now to enjoy the fruit of tomorrow.
What other consideration for Value Investing?
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