The 3 Most Important Indicators to Find Valued Stocks
Recently I have been reading books by Benjamin Graham on how to look for valued stocks. Here are the 3 financial indicators I have made for those who want to find a good valued stock.
1. High ROE.
You want to look for a company with high Return on Equity. Usually a company with over 15% of ROE is considered a good company. For example, by April, 2022,
2. Low Price-to-Book Ratio
The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market value to its book value.
If a PB ratio of below 1.0, is considered indicative of an undervalued stock.
You want to look for companies with low P/B ratio.
3. Low Price-to-Earnings Ratio
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).
The average P/E for the S&P 500 has historically ranged from 13 to 15. If a stock is traded at higher P/E ratio, it means it requires more earning growth than the ones traded at lower price to reach the same investment returns.
Usually P/E ratio varies by different industries. Traditional industries usually trade at a lower P/E ratio because people anticipate the companies to have stable growth rate.
Also P/S ratio, Price-to-Sales ratio, measuring companies which haven't generated positive earnings yet. If a company has net loss, then its P/E ratio will be negative and therefore P/E is not applicable in this situation.
1. High ROE.
You want to look for a company with high Return on Equity. Usually a company with over 15% of ROE is considered a good company. For example, by April, 2022,
- Google has a ROE of 30%,
- Apple is 149%,
- Tesla is 21% (much better than I thought),
- Microsoft is 48%,
- Facebook is 29.7%,
- and Amazon is 28%.
2. Low Price-to-Book Ratio
The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market value to its book value.
If a PB ratio of below 1.0, is considered indicative of an undervalued stock.
You want to look for companies with low P/B ratio.
- Google has a P/B ratio of 7.2
- Apple is 36.1,
- Tesla is 31.61,
- Microsoft is 13.52,
- Facebook is 5.18,
- and Amazon is 11.6.
3. Low Price-to-Earnings Ratio
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).
The average P/E for the S&P 500 has historically ranged from 13 to 15. If a stock is traded at higher P/E ratio, it means it requires more earning growth than the ones traded at lower price to reach the same investment returns.
Usually P/E ratio varies by different industries. Traditional industries usually trade at a lower P/E ratio because people anticipate the companies to have stable growth rate.
- Google has a P/E ratio of 24.1,
- Apple is 26.2,
- Tesla is 165,
- Microsoft is 30.46,
- Facebook is 17,
- and Amazon is 48.
Also P/S ratio, Price-to-Sales ratio, measuring companies which haven't generated positive earnings yet. If a company has net loss, then its P/E ratio will be negative and therefore P/E is not applicable in this situation.
I like to look at P/E ratio and ROE when I pick my stock.
Some companies trade at a relatively low P/E ratio between 3 to 6. A super low P/E ratio is not always a good sign. You also need to compare it with the industry competitors and find out the reason behind these indicators. Is it because it's undervalued? Or simply because they had an unusual increase of earnings which are not generated from their operating activities. Or is the earning increased due to the driven demand of the company's products?
Keep digging the real reasons behind the companies' performances. Use these indicators wisely. I find that these 3 top financial indicators very good reference for me to do more studies.
Comments
Post a Comment