Essential Metrics for Value Investors

Finding a reasonably priced good stock to invest in is a task in itself, and it’s even more difficult to gauge the ‘true value’ of the company, so we bring you some handy metrics that will help to find the actual value of the selected company to make wiser investment decisions.

The Price to Earnings (P/E) Ratio

This is the simple and effective metric that says a lot about the company in an instant. The Price to Earnings ratio is simply calculated by dividing the current market capitalization by its annual earnings.

Know more about PE Ratio

Formula

P/E Ratio = Current Market Cap / Annual Earnings

Price-earnings (P/E) Ratio: Ratio of a company’s share price to its earnings per share

Benefit: It’s great for comparing companies in the same sector.

The Price to Book (P/B) Ratio

This metric compares the market value of the company with its book value, that is why it’s a popular metric among value investors. If the company enjoys a good brand image, this calculation is especially useful since it uses tangible book value.

Formula

P/B Ratio =  Current Market Cap / Total Book value

Price-To-Book (P/B) Ratio: Compares the company’s market value to its book value

Benefit: Shows how much investors are willing to pay for a company’s assets

The Debt to Equity (D/E) Ratio

Debt can be the death knell for companies if not kept in check. If the economic climate is not crucial and still the company is carrying a large debt that’s a surefire warning sign.

Formula

D/E Ratio = Total Liabilities / shareholders’ equity

Debt / Equity (D/E) Ratio: This ratio is used to measure a company’s financial leverage

Benefit: It shows investors a company’s reliance on debt to carry out their operations.

Free Cash Flow (FCF)

The revenue or earnings don’t often equal the amount of cash that’s actually flowing in. Take, for example, depreciation, it can distort the company’s earnings, while making them appear higher or lower than they actually are.

Formula

FCF = Cash from Operations  – Capital Expenditures

Free Cash Flow (FCF): Cash a company can generate after spending what’s required on asset maintenance or expansion.

Benefit: It shows the amount of money that the company is really generating.

The Price/Earnings To Growth (PEG) Ratio

This is a great metric as it also adds ‘Projected Growth’ to the P/E Ratio. The calculation is done using the P/E Ratio and dividing by expected earnings growth (share).

Formula

PEG Ratio = (Share price /EPS) / EPS Growth Rate

EPS is Earnings Per Share

Price/Earnings To Growth (PEG) Ratio: Variation of the  P/E Ratio that also takes earnings growth into account.

Benefit: Can be used for comparing companies in the same industry, but in varying stages of growth.

So, there you have 5 great metrics that can deepen your research and make ‘Value Investing’ truly work for you!