Wednesday, February 26, 2014

How To Read A Stock Profile (Part 1 - Valuation)

     Many new investors get scared of or do not understand the technical side of stocks and investing.  On earnings reports and stock overviews you hear many terms regarding the company's finances and estimates regarding their future. In this post I will discuss the basics of the technical terms to give you a better understanding of what to look for in a company.  This example will use the profile of the stock Yandex (YNDX) which I have previously covered and the profile is taken from MarketWatch on 26 February 2014.


P/E (Price to Earnings) - The price of a stock divided by its earnings per share (EPS).  Yandex had an EPS of $1.21 and the current stock value is $37.76 resulting in a P/E of 31.2.  This value is larger then the value above because Yandex did not include extraordinary items (windfalls, write-downs...).  Understand that a stock P/E fluctuates daily as the stock price changes.  Typically if a stock has a high P/E you can expect large growth however the investment is riskier.  Stocks with a low P/E are less risky and have slow steady growth along with a better chance of the company paying dividends to keep investors.  Understand that the lower the P/E the better the value because you are buying more earnings power.

P/S (Price to Sales) - The total market value of a stock divided by total sales for the past year.   If a stock is $10 a share and they have 100 total shares the total market value of the stock is $1000.  If in the year they sold $4000 worth of product their P/S would be .25.  P/S tells you as an investor how much you are paying for each dollar of sales by the company.  This value is good to look at for new companies or companies that are not turning a profit.

Price to Book - This value is the ratio of a stocks price compared to its liquid value (office, computers, paper, cars...).  If the stock is $10 a share and the liquidation value of its assets was $1000 the Price to Book would be .01.  If the Price to Book ratio of a stock is less than 1 you are essentially paying more for a stock than its liquidation value is worth and that if a stock goes bankrupt you should get your money back.  If the value is greater than 1 do not expect your money back.  This value is not used often in investing however be aware of new stocks or old companies that are breaking down.

Price to Cash Flow - This value is the ratio of a stocks price compared to the cash from sale left over after company expenses are paid.  If a stocks value is $10 and the company made $5000 in sales and after expenses had $100 left over the Price to Cash Flow is .1.  This value tells you the investor how much you are paying per dollar of cash left after operating costs.  A low Price to Cash Flow is a good indicator of positive returns.

Enterprise Value to EBITDA - This value is considered the most important when looking at the likely hood of a stock to increase over time. Enterprise Value is the complete picture of a company's worth and the value someone would need to pay to buy them out.   EBITDA (earnings before interest, taxes, depreciation, and amortizations) is a value that does not allow companies to fudge their numbers or representation of their earnings.  Enterprise Value to EBITDA ultimately compares the company's value to how much profit is produced so a low EV to EBITDA is better.  If you see EBITDA to EV then a higher number is preferred.

Enterprise Value to Sales - This ratio is the value of the companies overall worth compared to its sales.  This value is similar to Price to Sale ratio however it is considered more accurate because it incorporates a company's debt and market capitalization.  Typically a lower value is preferred.

Total Debt to Enterprise Value - This ratio is the value of the companies current debt compared to its overall worth.  Investors prefer this value to be zero because companies that have debt must eventually pay them off causing future profits to be reduced.  This value is an indicator of such.

Valuation Summary

     There is no full-proof method of picking a stock based on its technicals however you can gage a stock on them.  Below is a quick-look of what you should look for.

1. Low EV to EBITDA or High EBITDA to EV
2. Low Price to Cash Flow
3. Low Price to Sales
4. Low Price to Earnings for slow growth, High for quick growth

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