The 4 Basics of a Stock's Value

Investing has a set of four basic elements that investors use to break down a stock’s value. In this article, we’ll take a look at four commonly used financial ratios: Price / Earnings Ratio (P / B), Price / Earnings Ratio (P / E Ratio), Price / Earnings Growth Ratio (PEG), and Dividend Yield. , and that they can tell you about an action. Financial reports are powerful tools to help you summarize the financial statements and health of a business or business


Price To Book (P / B) Ratio

Made for people who are half empty of glass, the price-to-book ratio (P / B) represents the value of the business if today it is torn up and sold. This is useful for knowing why many companies in mature industries falter in terms of growth, but can still be of good value depending on their business. Book value typically includes equipment, buildings, land, and anything that can be sold, including stocks and bonds.

With purely financial companies, the book value can fluctuate with the market as these securities tend to have a portfolio of assets that rise and fall in value. Industrial companies tend to have book value based more on physical assets, which depreciate year after year according to accounting rules.

Either way, a low P / N ratio can protect you, but only if it’s accurate. This means that an investor needs to take a closer look at the real assets that make up the relationship.

Price/earnings (P / E) ratio

The price/earnings (P / E) ratio is perhaps the most controlled of all ratios. If sudden increases in a stock’s price make you sizzle, then the P/E ratio is the steak. A stock can go up in value without a significant increase in earnings, but the P/E ratio is what decides whether it can stay up. Without gains to support the price, a stock will eventually fall back down. An important point to note is that only P/E ratios should be compared between companies in similar industries and markets.

The reason stocks tend to have high P/E ratios is that investors try to predict which stocks will enjoy progressively higher returns. An investor can buy a stock with a P/E ratio of 30 if he thinks it will double his earnings every year (thus significantly shortening the earning period). Otherwise, the stock will revert to a more reasonable P / E ratio. If the stock manages to double its gains, it will likely continue to trade with a high P / E ratio.

Dividend Yield

It’s always nice to have a backup when a stock’s growth falters. This is why dividend-paying stocks are attractive to many investors, even when prices go down you get a paycheck. The dividend yield shows how much pay you get for your money. By dividing the stock’s annual dividend by the stock price, you get a percentage. You can think of this percentage as interest on your money, with additional room for growth through stock appreciation.

Although simple on paper, there are a few things to watch out for with dividend yields. The inconsistent dividends or the payments suspended in the past mean that the performance of dividends cannot be counted on the water.


The P/E ratio, P/B ratio, PEG ratio and dividend yields are too narrow to be considered on their own as a single measure of a stock. By combining these valuation methods, you can get a better idea of ​​a stock’s value. Each of these elements can be affected by creative accounting, as well as more complex relationships such as cash flow.

As you add tools to your assessment methods, gaps become easier to spot. These four main reports may be overshadowed by thousands of custom metrics, but they will always be useful springboards to know if a stock is worth buying.

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