how do you do your fundamental analysis and get fair value?

[hanhao]

how do you do your fundamental analysis and get fair value?

for Company Analysis, i would look at the ratios because they are the easiest to tabulate

- net Profit Margin.
- P/E Ratio.
- Book Value Per Share.
- Current Ratio.
- Debt Ratio.
- Inventory Turnover.

i understand there are other stuff like Economic Analysis and Industry Analysis

some questions :
- how do i look at these ratios and deduce that this stock is worth $1 and not $1.5?
- how often do companies report these ratios? quaterly or annually?
- would it be good to tabulate companies of the same industry and compare their to see who give the best sets of ratios. but what is "best set of ratio", how to compare?
- is there any program to tabulate these automatically and nicely




also, whats your take on http://www.sharesguru.com/valuationTools/cgviFormula.htm ?

CGVI : How it Works


Primarily used as an indicator in selecting shares worth further analysis. It combines the price/earnings ratio and the reinvestment rate into a single rating.

The formula:

1. Find the earnings yield, which is earnings per share divided by the price of the stock. Earnings yield is the reciprocal of the price/earnings ratio. Other things being equal you want to buy a stock with a high earnings yield, that is, with a low P/E.
2. Find the reinvestment rate. This is the amount of earnings not paid out in dividends (Earnings per share less dividends per share), divided by book value. It’s a measure of how fast book value per share is growing. It is a kin of the more often used return on equity, or earnings divided by book value. Either statistic tells us something about how effectively a company uses shareholder’s capital to make money. The reinvestment rate however, gives credit only for returns to capital that are put back into the business
3. Find the dividend yield, the annual payout divided by the stock price.

Now add A, B and C to give CGVI.

Suggested Levels:

>30


Special Buy

24 – 30


Optimal Buy

20 – 24


Accumulate

17 – 20


Hold

12 – 17


Look for better investment

<12


Do not consider

Assuming all other factors are constant, a doubling in earnings per share will roughly double the stock’s CGVI.
If a company increases the percentage of earnings paid out as dividends, it will reduce it’s CGVI if the stock is selling above book value. Increased dividends help when the stock is selling below book value.

One point to take note of, as the formula relies on past data, it assumes that the company will be able to continue to generate the same return in the future. For larger companies, in the later stages of growth, that will often be a problem. Due to this weakness, the formula works best with small and medium sized companies, where the potential for continued profitable growth is greater.

experts here pls teach a newbie like me :wink:

 

[pirx]

Hello,

just a quick answer here, which you may find usefull:

Try this.

 

[forexian]

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'.

 

[pirx]

Hi Forexian,

may I ask, which valuation model do you use when evaluating the "fair value" for a stock?

I usually use the built-in evaluation models in AAII Stock Investor Pro, or I use the web site I provided in my previous post.

 

[Splitlink]

Hi Hanhao,

For FA I find that "The Zulu Principle" by Jim Slater was one of the easiest of books to read, understand one that just about explains it all. I use it in all my purchases of portfolio shares

The book shows how to search for undervalued growth shares, not undervalued shares on an asset basis. Well worth the price.

When you have read it I'd be pleased and grateful for a chat abut it, just ask for Split any old time.

Split

 

[Paul71]

Hi guys.

Since July last year, the S&P 500 has rose roughly 30%. This is an average per stock. One third undervalued? Gained in Nearly 12 months?

Can i ask you 'fundies' a question?

What's caused this, why did the fundamentals change so sudden that it moved itself one third of it's original value, why was it so undervalued, are the big funds and institutions taking the p...?

Thanks in advance for any answers.

 

[chump]

the companies that make up the S & P 500 are for the most part multi's and their foreign sales when translated back into $ point in only one direction :arrowu:
It's a trade based on the weakness of the dollar.There are some exceptions of currencies that have not gained in value against the dollar,but generally if you look at the major currencies you should see what I mean.

 

[Paul71]

the companies that make up the S & P 500 are for the most part multi's and their foreign sales when translated back into $ point in only one direction :arrowu:
It's a trade based on the weakness of the dollar.There are some exceptions of currencies that have not gained in value against the dollar,but generally if you look at the major currencies you should see what I mean.

Hello there.

Yes, i see it. The weak dollar, would you say that is the most important factor? I only ever look at charts, i should put some other studies in really.

Thanks.

 

[ajaskey]

the companies that make up the S & P 500 are for the most part multi's and their foreign sales when translated back into $ point in only one direction :arrowu:
It's a trade based on the weakness of the dollar.There are some exceptions of currencies that have not gained in value against the dollar,but generally if you look at the major currencies you should see what I mean.

Another factor is these companies have little to no debt. A significant amount of the earnings have been used to repurchase company stock. This reduces supply as demand increases due to increased quality earnings. In 1999-2001, companies were issuing stock like wild people and building capacity beyond what the system needed. Normal supply/demand brought on the US recession and bear market - as it always does.

 

[chump]

"would you say that is the most important factor? " ..if I did I would be making an assumption.
Our friend above cites yet another contributing factor. Companies have chosen to buy back shares at a higher rate than typical instead of reinvesting profits in expansion. Been happening here in the UK as well although over the same period UK 'blues' have not had the advantages of currencies working for them in the same way.
You might also say that if the currency is weak and you don't believe your central bank will step in and support it ,they are actively accepting of the fact that your currency is going to lose it's purchasing power..under those circumstances you would look for an hedge against that wouldn't you and historically equities have been that hedge rather than gold and the multis of course give you exposure to to the faster growth that has been happening outside the US without the need to invest directly in such markets.

 

[forexian]

Hi Forexian,

may I ask, which valuation model do you use when evaluating the "fair value" for a stock?

I usually use the built-in evaluation models in AAII Stock Investor Pro, or I use the web site I provided in my previous post.

analysts often use more than one model on a single stock to calculate the fair value. Dividend and Free Cashflow discount are quite difficult to use, mainly due the large amount of input variables. The simplest models to apply are the price multiple models i.e. the P/E models, P/BV ... P/Sales etc. Google these terms.. u'll find alot of info there...

 

[Paul71]

the companies that make up the S & P 500 are for the most part multi's and their foreign sales when translated back into $ point in only one direction :arrowu:
It's a trade based on the weakness of the dollar.There are some exceptions of currencies that have not gained in value against the dollar,but generally if you look at the major currencies you should see what I mean.

Hi Chump.

What about countries that don't have a weak currency. What about ftse stock?

Thanks.

 

[chump]

http://ddo.typepad.com/ddo/2006/11/warren_buffett_.html

 

[Atilla]

Hi Chump.

What about countries that don't have a weak currency. What about ftse stock?

Thanks.

Because oil is priced in $ollars and £1=$2.03 means oil costs a lot less. Advantage as cheap fuel.

50% of UK companies based in US.

60-70% of UK trade with Europe so £ v € relationship more important.

For the UK not a big factor.

Main downside is UK companies who earn US $. Their earnings will be less.

Apply selection. Hanson may well fall I guess.