How can overvalued stocks affect a company?
This is how you can find undervalued stocks
As we know, long-term selection of stocks is very different from day trading. It just makes a difference whether you only want to hold a stock for a short time or whether you want to invest long-term. Undervalued stocks are often a good choice for “something longer”.
But how do you know if a stock is undervalued? A few indicators will help you find out. Below we look at the four most common.
P / E ratio
The price-earnings ratio (P / E) compares the price of a share with the company's actual earnings.
To calculate this, we take the current price of a share and divide it by the company's earnings per share. The lower the ratio, the better.
Typically, the company's P / E ratio is compared to the industry average. For example, the ratio of Ford is compared with the average of other automobile manufacturers. If it's below average, it's a good sign.
However, this indicator is not reliable when evaluating startups that have very high expected growth but are not yet making profits.
Price to Book
The Price to Book (P / B) ratio compares the share price to the total value of a company's assets, the "book value".
To get this ratio, let's compare the share price with the net worth per share. This indicator shows how much you are paying for some of the company's tangible (actually resalable) assets.
If the result is between 0 and 1, the company could be undervalued.
However, the P / B tends to underestimate companies with intangible assets (such as patents, copyrights, trademarks) as this type of property is not included in the calculation.
This is the ratio between a company's annual dividend and its current share price. The higher the dividend / price ratio of a stock, the higher the annual return you can expect, regardless of the price. In theory, anyway.
Therefore, long-term investors should definitely consider this indicator. This number can also be e.g. B. only rise because the share price falls, which usually means that the dividend will soon be cut.
The price-earnings-growth-ratio (PEG)
The above indicators are good at gauging the value of a stock * at the moment *, but we all know that investors should consider a company's future earnings potential.
This is where the PEG (Price-Earning to Growth-Ratio) comes into play. It uses the P / E ratio from above, but also takes into account the company's expected growth rate, typically for the next five years *.
To calculate the PEG, we take the P / E ratio and divide it by the expected rate of increase in earnings. It's a more meaningful indicator of P / E ratio and is generally considered to be the most reliable index for finding out whether a company is undervalued or not.
The lower the PEG, the more the company's shares are considered cheap. If the indicator is between 0 and 1, the company is likely undervalued. If it's higher than 1, it could be overrated.
If it's negative, it means the company is behind or its profits are likely to decline! In this case: hands off! What if you've found your stock and want to invest in it? This works without commission, for example with BUX Zero. Have a look 🙂
Disclaimer: All views, opinions, and analysis in the articles are those of the author and do not represent the views of BUX. Neither BUX nor the author provide financial advice, and the articles should not be construed as advice.
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