Sunday, October 6, 2013

How to Value A Company

In this article, we will answer a Foolish question asked by one of our readers. He asked the following (edited slightly): “How do we go about determining the value of a stock and that it is not overvalued now?”

There are a number of ways to value a company. Let’s take a look at three of them (in no particular order).

The first method would be the price-to-earnings (PE) ratio. The PE ratio is obtained by dividing the current stock price by the earnings per share (EPS) of the company. For example, the EPS of Singapore Exchange Limited (SGX: S68) for Financial Year 2013 was $0.314. The share price, at the time of writing, is $7.63. Therefore, $7.63 divided by $0.314 gives a PE ratio of 24.3. The PE ratio can be used for service and manufacturing companies. To determine if the company is overvalued or undervalued, the PE ratio can be compared across the industry. If the PE ratio of  Breadtalk (SGX: 5DA) is higher than its peers in the Food & Beverage industry for instance, it may be deemed to be overvalued and vice versa.


The next method is the  price-to-book (PB) ratio  It is also sometimes called the price-to-net-asset-value (P/NAV) ratio. The book value and the net asset value (NAV) mean the same thing. The book value of a company is the total assets minus total liabilities. The PB ratio is obtained by dividing the current stock price by the book value of the company. For example, the book value of City Developments Limited (SGX: C09) is $8.30, as of 30th June 2013. The share price, at the time of writing, is $10.47. Therefore, $10.47 divided by $8.30 would give a PB ratio of 1.26. The PB ratio is generally used for companies that are asset-heavy, like property companies and real estate investment trusts (REITs), and banks. Generally, a PB of less than one means that the company is undervalued and anything above one may mean the company is overvalued.

Another method is the price-to-sales (PS) ratio.  This ratio is usually used for companies that are not making profits but are expected to turnaround soon. The PS ratio is obtained by dividing the current stock price by the revenue (or sales) per share of the company. Another way is to divide the current market capitalization by the total revenue of the company for the year. Revenue and sales mean the same thing. For example, Grand Banks Yachts Limited (SGX: G50) has had negative earnings since the sub-prime crisis as it was impacted heavily during the downturn. To calculate its PS ratio, take the current market capitalization of $39.8 million divided by the total revenue of $35.3 million to yield 1.13. The PS ratio has to be compared with its peers to determine if it is undervalued or overvalued.

Other valuation methods include PEG (PE/annual EPS growth rate) ratio, discounted cash flow (DCF), discounted dividend model (DDM), enterprise value multiples and other price multiples like price-to-cash flow ratio. We have to bear in mind that the valuation methods and the value obtained are not cast-in-stone.  These  numbers and ratios can be drastically altered if our assumptions that go into them are changed and it’s something investors have to take note of. For example, in a comparison across industry-peers when using the PE or PS ratios, the implicit assumption is that its peers are valued correctly as well.

This means that valuations are fluid and they change as the fundamentals of the company change. Warren Buffett said that he rather be approximately right than precisely wrong when it comes to valuation. We do not need to get a precise figure down to the eighth decimal point when it comes to valuation. A ballpark figure is good enough.


Source/Extract/Excerpts/来源/转贴/摘录: http://www.fool.sg/
Publish date: 03/10/13

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Warren E. Buffett(沃伦•巴菲特)
Be fearful when others are greedy, and be greedy when others are fearful
别人贪婪时我恐惧, 别人恐惧时我贪婪
投资只需学好两门课: 一,是如何给企业估值,二,是如何看待股市波动
吉姆·罗杰斯(Jim Rogers)
“错过时机”胜于“搞错对象”:不会全军覆没!”
做自己熟悉的事,等到发现大好机会才投钱下去

乔治·索罗斯(George Soros)

“犯错误并没有什么好羞耻的,只有知错不改才是耻辱。”

如果操作过量,即使对市场判断正确,仍会一败涂地。

李驰(中国巴菲特)
高估期间, 卖对, 不卖也对, 买是错的。
低估期间, 买对, 不买也是对, 卖是错的。

Tan Teng Boo


There’s no such thing as defensive stocks.Every stock can be defensive depending on what price you pay for it and what value you get,
冷眼(冯时能)投资概念
“买股票就是买公司的股份,买股份就是与陌生人合股做生意”。
合股做生意,则公司股份的业绩高于一切,而股票的价值决定于盈利。
价值是本,价格是末,故公司比股市重要百倍。
曹仁超-香港股神/港股明灯
1.有智慧,不如趁势
2.止损不止盈
成功者所以成功,是因为不怕失败!失败者所以失败,是失败后不再尝试!
曾淵滄-散户明灯
每逢灾难就是机会,而是在灾难发生时贱价买股票,然后放在一边,耐性地等灾难结束
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