Hi Hanhao,
The model u quoted from shares guru is one of the several hundred valuation models available today. What I understand is that u r mixing two different approaches of evaluating a company's stock. RATIO ANALYSIS and COMPANY VALUATION are basically two different things.
When u do **ratio analysis**, u calculate several different ratios from a company's financial statements. These can be either calculated quarterly or annually. After that, u either compare these with similar companies in the same industries or with industry benchmarks. There is no standard industry benchmarks available, so u'll probable have to estimate them too using averages from major companies in a particular industry. Ratio analysis is useful in evaluating a company's profitability, liquidity, leverage and other factors. This approach does not directly help in equity investing, but it gives an idea of a company's financial performance and may help to filter good companies for further analysis. **Company Valuation** deals with calculating the intrinsic value of a company based on its fundamentals. There are several approaches to this, like Dividend Valuation, Free Cashflow Valuation, Price Multiples Valuation, Residual Income Valuation, etc. In some methods (like Dividend and Cashflow Valuation) u predict the future inflows from a company (using several financial analysis techniques) and discount them back to today (i.e calculate today's value of these future cashflows). That TODAY's value or PRESENT VALUE is basically the intrinsic value of a company. If it is greater than the market value, then the company's stock is under-priced a BUY is recommended. The opposite applies to SELL.
This is a short summary company valuation and ratio analysis. Hope this helps.
Happy Tradin'. |