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Stocks 401: Understanding Value

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1.
What form of capital does market capitalization not include?
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Debt. Because of this limitation, some investors turn to enterprise value, which does include debt, among other factors.
2.
You should determine a company's valuation before buying its stock because doing so will help you see whether its stock is overpriced or underpriced
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True. Valuation should be standard procedure for all investors. Buying an overpriced stock is ultimately not very profitable.
3.
After finding a great business, determining the company's valuation is _______.
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Fundamental. Valuing a stock is a fundamental component of the investing process. Even the greatest company in the world might not be an attractive investment if the stock is priced too high.
4.
Stock valuation ratios compare a company's market value with what?
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Any of the above. Valuation ratios compare market value with any of several figures about the company's finances.
5.
What are the two parts to the value of a business?
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The current value of the business's assets and liabilities, and the value of the business's expected future profits. Investors take both into account when valuing a company.