Cash Flow As Used In The Price-Cash Flow Ratio Valuing Valuations

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Valuing Valuations

There are only two types of valuations available for stocks. One is an educated guess as to what a stock could, should, or would be worth after considering all the different valuation methods and techniques that might exist. The second type is found by typing the stock symbol into a financial website, seeing what the last quoted price was, and then knowing in real time what it is actually worth. Yes, the second type is much easier than the first, but don’t get too excited just yet. Neither type could exist without the other, and unfortunately, if you want to make money buying and selling stocks, you’ll need to learn how to use both.

The actual real-time valuation of a stock is calculated using simple supply and demand. It can be found by looking at the last actual inventory sale that occurred using the simple auction method. Multiplying the share price by the number of shares the company has outstanding gives you the total value or market capitalization of the company. Since it’s plain and simple, for this article we’ll focus on another type of stock valuation, the educated guess type. Just keep in mind that many methods for calculating an educated guess are based on the actual bid and ask price in real time, so it’s important to not only know where a stock is now, but also where it has been in the past.

What’s the point of making an educated guess about what you think the stock should, could, or should be worth? Whether you call it fair value, intrinsic value, fundamental value, or something else, the bottom line is that you’re looking for a number that’s separate from the current price. Once you determine this number, you can compare it to the current price and decide whether the stock is undervalued, overvalued, or just right. The analysis should not end here, you should also determine whether the stock is undervalued or overvalued with or without reason. One way to gain tremendous insight into this dilemma is to look at historical stock valuations, not just current valuations. You’ll also want to look at current and historical valuations of closely related stocks, stocks in the same sector, stocks of a similar size, and even all stocks in general.

If you’re reading this article, there’s a pretty good chance you’ve heard of P/E, or the price-to-earnings ratio. This is without a doubt the most popular valuation measure. EPS or earnings per share is the bottom line of how well a company is doing. We can look at the current P/E, which is the current price divided by the last twelve months’ earnings, and we can say that the lower the P/E, the cheaper the stock. We can also look at the forward P/E by taking the current price and dividing it by the forecast earnings for the next year or two. We can also take the P/E ratio and divide it by the projected earnings percentage growth, which is known as the PEG ratio. Typically, a PEG of 1 is considered fair value.

If you’re interested in lower stock prices like we are, you probably know that the earnings aren’t that great when the stock price goes down. This means we have to find more creative ways to value the stocks we are interested in. We believe there is an advantage here for small-cap and micro-cap stock traders who become adept at valuing stocks. Without so many cut ratios and dry valuations, share prices in this arena become increasingly inefficient, so issues can become severely undervalued or overvalued.

There are tons of ratios and metrics to look at, all of which come from the income statement, balance sheet, or cash flow statement. Many of these numbers are divided by the share price or the number of shares outstanding or both to get a per share number that is easier to think about. You’ll be able to find a ton of ratios to consider just by looking around on financial websites, and many of them are self-explanatory. We’ll take a look at a few you may not have considered, but remember, the more relationships you look at, the better. Even if you feel confused at the end of your exhaustive research, we guarantee that you will be able to come up with a much more efficient guess than those who only look at P/E.

Price to Sales or P/S compares a stock’s current price to its trailing twelve month earnings. This figure will vary much more than the P/E between different stocks. Note that the sales part of the equation is calculated on a per share basis, so the fewer shares outstanding and the more revenue the company has, the better or lower the number will be.

Enterprise value is a better way to value a company as a whole than just looking at market capitalization. When a company is taken over, the buyer must assume the company’s debts but pocket the money, and the value of the company is a good approximation of what the suitor would have to pay. EV is calculated by taking market capitalization and adding up all short and long term debts and accounts payable. Then you subtract cash and cash equivalents and receivables.

EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a pretty good profit normalizer. Remember that most financial firms calculate EPS, P/E and PEG using non-GAAP or pro forma numbers. These are earnings before large one-off items and may be less normalized than EBITDA. If you really want to get fancy, a great valuation metric is enterprise value vs. EBITDA and compare it to other companies.

Don’t forget to look at all the balance sheet ratios like book value, price to book value, price to money and so on. This is a good way to find stocks that may be undervalued if you have a longer time frame to work with. Has the stock had a low book value for a long time? If so, it can be a very safe and boring question. Did they suddenly fall? The culprit could be something in the area of ​​earnings or revenue. Always be aware that ratios that are too low are almost always a bad sign. Again, the point should be that the more dimensions of stock valuation you can see, hear, smell, taste and touch, the more likely you are to make a good decision.

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