Vlad RF
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How to Estimate Companies' Price and Make Investment Decisions
Author: Maks Artemov
Dear Clients and Partners,
The price of a company often influences your decision whether to invest in it or not. Of course, you can neglect this property and use, say, tech analysis; however, knowing the real market price of a chosen company, an experienced investor can make conclusions about the results of their investments in the long run.
In this article, I will not focus on evaluating and analyzing companies for speculative or short-term trading. My goal is to teach you to determine the price of the company and your perspectives of long-term investments. By long-term, I mean several years or even decades. This is how known-to-all Warren Buffett invests.
Underestimated companies will always be more profitable in terms of investments because their stock price is likely to grow in the future. As for overestimated companies, their perspectives are more modest or lacking at all. The stocks of such companies might soon correct, which will lead to unreasonable losses or freeze your investments.
Estimating the cost of a company
For a complex estimation of a company's price, several multipliers can be used:
P/E (Price to Earnings) is a multiplier showing the under- or overestimated state of companies. Using the P/E multiplier, an investor can forecast when their money will pay back. The smaller P/E, the sooner it will happen. We already discussed P/E in earlier articles.
P/S (Price to Sales ratio) is literally the price of the company in ratio to its annual revenue. Unlike P/E, it can be applied to losing companies. A P/S value below 2 is considered good, and the higher it is, the worse investment this will be. An almost perfect value is one.
P/BV (Price to Book) shows the size of the company's assets minus its commitments (debts). The multiplier compares the company's capital to its capitalization in the stock exchange. A P/BV value of 1 means that currently, its stocks cost less than in the exchange (are undervalued). If the value is between one and zero, the company is overpriced. If the multiplier is zero, this means that the company is not all right, and you should better ignore this investment opportunity.
Using multipliers, investors usually compare several companies from the same sector. For the estimation, the report of the previous period, current period, and forecasts are used. By comparing the data, we can conclude which company is more attractive for long-term investments.
Peculiarities of multipliers
If you use multipliers, you need to take into account the following:
On the website, you can single out companies depending on their business, stock price range, and the country of registration. Mind that it is for the investor to decide which data to base their decision on.
Read more at R Blog - RoboForex
Sincerely,
RoboForex team
Author: Maks Artemov
Dear Clients and Partners,
The price of a company often influences your decision whether to invest in it or not. Of course, you can neglect this property and use, say, tech analysis; however, knowing the real market price of a chosen company, an experienced investor can make conclusions about the results of their investments in the long run.
In this article, I will not focus on evaluating and analyzing companies for speculative or short-term trading. My goal is to teach you to determine the price of the company and your perspectives of long-term investments. By long-term, I mean several years or even decades. This is how known-to-all Warren Buffett invests.
Underestimated companies will always be more profitable in terms of investments because their stock price is likely to grow in the future. As for overestimated companies, their perspectives are more modest or lacking at all. The stocks of such companies might soon correct, which will lead to unreasonable losses or freeze your investments.
Estimating the cost of a company
For a complex estimation of a company's price, several multipliers can be used:
P/E (Price to Earnings) is a multiplier showing the under- or overestimated state of companies. Using the P/E multiplier, an investor can forecast when their money will pay back. The smaller P/E, the sooner it will happen. We already discussed P/E in earlier articles.
P/S (Price to Sales ratio) is literally the price of the company in ratio to its annual revenue. Unlike P/E, it can be applied to losing companies. A P/S value below 2 is considered good, and the higher it is, the worse investment this will be. An almost perfect value is one.
P/BV (Price to Book) shows the size of the company's assets minus its commitments (debts). The multiplier compares the company's capital to its capitalization in the stock exchange. A P/BV value of 1 means that currently, its stocks cost less than in the exchange (are undervalued). If the value is between one and zero, the company is overpriced. If the multiplier is zero, this means that the company is not all right, and you should better ignore this investment opportunity.
Using multipliers, investors usually compare several companies from the same sector. For the estimation, the report of the previous period, current period, and forecasts are used. By comparing the data, we can conclude which company is more attractive for long-term investments.
Peculiarities of multipliers
If you use multipliers, you need to take into account the following:
- For new and developing companies, multipliers can be faulty.
- You cannot estimate the company by just one index; your approach must be complex.
- Comparing companies from one sector, take notice of their business, the number of employees, and debts.
On the website, you can single out companies depending on their business, stock price range, and the country of registration. Mind that it is for the investor to decide which data to base their decision on.
Read more at R Blog - RoboForex
Sincerely,
RoboForex team