Thread by @talkcentss

This Thread Unlocks the Secrets to Understanding Company Valuations.

( Get your Notepads )👇🏽

1/ Introduction

First,
Let’s look at the most commonly used valuation metrics:

* P/E Ratio
* P/B Ratio
* PEG Ratio
* P/S Ratio

Here is how you can apply these metrics 👇🏽

2/ The Price-Earnings Ratio

The P/E Ratio is calculated by dividing a company's share price by its Earnings Per Share (EPS)

See below👇

2.1/
To work out the Earnings Per Share (EPS)

You need to know two things:

- Net Income
- Outstanding shares

* Divide the net income by outstanding shares.

2.2/

To find the net income and outstanding shares you need the financial statements of your respective company.

- Net income ( Income statement)
- Outstanding shares ( Balance sheet)

Look below 👇🏽

In this example, this company has an EPS of R7.20

Can you guess who?

2.3/

The P/E ratio is used by investors to give an indication of whether a stock is overvalued or undervalued

A lower P/E ratio indicates that a stock is undervalued, while a higher P/E ratio indicates an overvalued stock

*Investors should compare the P/E ratio to competitors

2.4/

Quick Recap, before moving on

From the data above, (TTM)

Current price: R51.42
EPS: R7.20

P/E ratio: 7.14

Do you know what company this is? And do you think it’s is currently over or undervalued?

3/ Price to Book Ratio

The P/B ratio is calculated by dividing a company's share price by its Book Value Per Share.(BVPS)

This is how you calculate the Price to Book ratio👇

3.1/ Book Value Per Share (BVPS)

Is calculated by subtracting the total liabilities from total assets and then dividing it by outstanding shares.

* You need the book value before you can work out the P/B ratio above.

3.2/

Again, you’ll need the financial statements of your respective company to work it out.

*Assets and liabilities are found on the balance sheet

Take note:
I’m just showing you were the data is, I’m not working valuations out here.

3.3/

Quick recap:

(BVPS) = Assets - liabilities ÷ outstanding shares

(P/B ratio)= Share Price ÷ BVPS

3.4/

It is believed a lower book value is considered undervalued and a higher book value is overvalued.

Do you use the P/B ratio in your analysis?

4/ Price/earnings-to-growth ratio

The PEG ratio is calculated by dividing a company's P/E ratio by its EPS growth rate.

This metric helps investors value a stock by taking into account a company's market price, its earnings, and its future growth prospects

4.1/

Generally speaking,

a PEG ratio of less than 1 is considered undervalued.

But a PEG ratio of more than 1 is considered overvalued.📊

5/ Price to Sales Ratio

The P/S Ratio compares a company's stock price to its revenues.

The ratio shows how much investors are willing to spend for each rand/dollar of revenue.

* Comparing this ratio to stocks in the same sector is the best approach.

5.1/

The lower the P/S ratio, the better, as a lower P/S ratio indicates that a stock is undervalued.

And vice versa,

The higher the P/S ratio, the more likely a stock is to be overvalued.💸

6/ Remarks

There is no metric that is end all be all.

Investors should use more than 1 metric when attempting to value a stock, or use a the DCF model for valuations.

#investments

To understand The DCF model better, read the thread below 👇🏽

That’s it, that’s the tweet. You can follow me @talkcentss for more financial content.

You can expect more of the same:

- Company breakdowns
- Stock research
- Valuations