What to Look For in Value Investing
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What to Look For in Value Investing
Many factors can help investors identify strong companies with stock that is temporarily undervalued.
Things To Know
- A stock with a price-to-book ratio of 2/3 or less may be a value stock.
- Return on equity might indicate a value stock.
Check out P/B and P/E ratios
A starting point may be to look at the price-to-book ratio (P/B) and the price-to-earnings ratio (P/E). The price-to-book ratio is the stock price divided by the book value (the value of the company’s assets). If a stock’s price is $20 and its book value is $30, the price-to-book ratio is 2/3. A stock with a price-to-book ratio of 2/3 or less may indicate a value stock. Similarly, the price-to-earnings ratio is the stock price divided by the company’s annual earnings. A stock with a price-to-earnings ratio of 2/3 or less that of other companies in its respective industry or the market as a whole may also be a value stock.
Also, check out ROE
Another important factor to review is the company’s return on equity (ROE). The ROE is a percentage calculated by dividing the net income of a period by the common stock equity, or net worth. When it comes to value investing, a declining ROE can be a good thing, since it may suggest that the company is financing with less debt and holding more assets, which could be used for acquisitions or other growth. Of course, further investigation would be necessary to confirm those reasons.
Don’t forget the other fundamentals
Value investors also may examine a company’s dividend yield, or the investor’s annual percentage of return per share, as well as its debt load, cash flow, assets, and earnings history. Identifying these figures can help investors evaluate whether the company has the resources and expertise needed to grow profits and deliver earnings in the future.
