In the financial markets, stock valuation is the method of calculating the theoretical value of firms and their shares. The main use of this method is to predict future market prices, or more generally, potential market prices, and thus to profit from price movements - shares assessed undervalued (in terms of their theoretical value) are purchased, while overvalued stocks are sold, in the hope that undervalued shares will rise in overall in value, while overvalued stocks will generally decline in value.
In the view of fundamental analysis, stock valuations based on fundamentals aim to provide an estimate of the intrinsic value of a stock, based on predictions of future cash flows and business profitability. Fundamental analysis can be replaced or supplemented by market criteria - what the market will pay for shares, ignoring the intrinsic value. This can be combined as a "cash flow forecast/future profit (fundamental)", along with "what will the market pay for this profit?" This can be seen as the "supply and demand" side - what is the underlying supply (stock), and what drives the (market) demand for supplies?
In the view of John Maynard Keynes, stock valuation is not a prediction but a convention, which serves to facilitate investment and ensure that stock is liquid, though supported by an illiquid. businesses and illiquid investments, such as factories.
Video Stock valuation
Fundamental criteria (fair value)
The most theoretical stock valuation method , called earnings or discounted cash flow method ( DCF ), involves profit discount (dividend, profit, or cash flow) shares will be brought to future shareholders, and the final value at disposal. The discount rate usually includes a risk premium that is generally based on a capital asset pricing model.
In July 2010, the Delaware court ruled the appropriate input to be used in the analysis of discounted cash flows in disputes between shareholders and the company at fair value of the shares. In this case the shareholder model gives a value of $ 139 per share and the company model provides $ 89 per share. The contested inputs include terminal growth rates, equity risk premiums, and beta.
A fundamental valuation is an assessment that people use to justify stock prices. The most common example of this type of assessment methodology is the P/E ratio, which stands for Price to Earnings Ratio. This form of assessment is based on historical and statistical ratios and aims to assign value to a stock based on measurable attributes. This form of assessment is usually what drives long-term stock prices.
Another way of valuing stocks is based on supply and demand. The more people who want to buy the stock, the higher the price. And conversely, the more people who want to sell the stock, the lower the price. This form of assessment is very difficult to understand or predict, and often encourages short-term stock market trends.
There are many ways to assess stocks. The key is to take every approach into your account while formulating stock opinion overall. If the valuation of the company is lower or higher than other similar stocks, then the next step is to determine the reason.
EPS is the net income available to the general shareholders of the company divided by the number of shares outstanding. There will usually be two registered EPS types: a GAAP (Generally Accepted Accounting Principles) EPS and EPS Pro Forma, which means that revenue has been adjusted to exclude one time item as well as some non-cash items such as amortization of goodwill or stock option fees. The most important thing to look for in EPS numbers is the overall quality of earnings. Make sure companies are not trying to manipulate their EPS numbers to look like they are more profitable. Also, look at EPS growth over the last few quarters/years to understand how volatile their EPS is, and to see if they are an underachiever or overachiever. In other words, do they consistently beat expectations or do they continually reassert and lower their estimates?
The most used EPS number of analysts is EPS pro forma. To calculate this amount, use a net profit that excludes one-time gains or losses and excludes non-cash expenses such as amortization of goodwill. Never exclude non-cash compensation costs because it affects earnings per share. Then divide this figure by the number of fully diluted shares outstanding. EPS figures and historical forecasts for the next 1-2 years can be found by visiting free finance sites like Yahoo Finance (enter the ticker and then click on "forecast").
Price to Earn (P/E)
Now analysts have some EPS figures (historical and forecast), analysts will be able to see the most commonly used valuation techniques, price to income ratio, or P/E. To calculate this figure, one divides stock prices by the annual EPS figures. For example, if a stock is trading at $ 10 and EPS is $ 0.50, P/E is 20 times. Complete analysis of some P/E includes viewing historical and advanced ratios.
Historical P/Es is calculated by taking the current price divided by the EPS amount for the last four quarters, or for the previous year. P/E historical trends should also be considered by looking at the historical P/E charts over the last few years (found on most financial sites like Yahoo Finance). Consider specifically what range of traded P/E to determine whether current P/E is high or low compared to its historical average.
Forward P/Es reflects the future growth of the company into the future. Forward P/Es is calculated by taking the current stock price divided by the EPS forecast amount for the next four quarters, or for EPS forecasts for the next calendar or one or two fiscal years.
P/Ice changes constantly. If there is a major price change in a stock, or if the earnings forecast (EPS) changes, the ratio is recalculated.
Growth rate
Valuation depends on the expected growth rate of a company. We should look at the historical growth rate of both sales and income to get a feeling for the kind of expected future growth. However, companies are constantly changing, as well as economically, so just using the historical growth rate to predict the future is not an acceptable form of assessment. Instead, they are used as a guide for what future growth can look like if a similar situation is encountered by the company. Calculating future growth rates requires personal investment research. It can take the form of listening to a company's quarterly conference call or read press releases or other company articles that discuss the company's growth guidance. However, while companies are in the best position to forecast their own growth, they are often far from accurate, and unforeseen events can lead to rapid changes in the economy and the industry.
For any judgment technique, it is important to look at various approximate values. For example, if the company rated grew an income between 5 and 10% every year for the past 5 years, but believes that the company will grow 15-20% this year, a more conservative growth rate of 10-15% will be appropriate in the assessment. Another example is for companies that have undergone restructuring. It may have increased 10-15% revenue over the last few quarters or years due to cost cutting, but their sales growth could be only 0-5%. This would indicate that their revenue growth may be slowing when cost cuts have been fully enforced. Therefore, estimating earnings growth closer to a 0-5% level would be more appropriate than 15-20%. Nonetheless, the growth rate appraisal method relies heavily on foresight to make forecasts. This is why analysts often make inaccurate estimates, and also why familiarity with a company is so important before making an estimate.
Replacement of capital structure - asset price formula
Capital structure substitution theory (CSS) describes the relationship between profit, stock prices and the structure of public company capital. The equilibrium condition of CCS theory can be easily reset to the asset pricing formula:
Where
- P is the current market price of a public company x
- E is the earnings per share of the company x
- R is the nominal interest rate on corporate corporate bonds x
- T is the corporate tax rate
The CSS theory shows that the firm's stock price is strongly influenced by bondholders. As a result of an active buyback or disbursement of shares by company management, the equilibrium price is no longer a result of balancing shareholder demand and supply. The asset pricing formula only applies to debt-holding companies.
Asset pricing formulas can be used at the aggregate market level as well. The resulting graph shows you at what time S & amp; P 500 Composite is too expensive and at what price it is below relative to the balance of substitution capital structure theory. At a time when the market is underappreciated, the company's repurchase program will allow the company to increase earnings per share, and generate additional demand in the stock market.
Ratio of revenue to growth (PEG)
This assessment technique has really become popular over the last decade or so. This is better than just looking at P/E because it takes into account three factors; price, income, and income growth rate. To calculate the PEG ratio, P/E Forward is divided by the expected growth rate of income (one can also use historical P/E and historical growth rates to see where it has been traded in the past). This will result in a ratio that is usually expressed as a percentage. According to theory, when percentages rise over 100%, stocks are becoming more and more overvalued, and as the PEG ratio falls below 100%, the stock becomes more and lower. This theory is based on the belief that the P/E ratio should approach the long-term growth rate of the firm's revenue. Whether this is true will never be proven and therefore theory is just a rule of thumb for use in the whole assessment process.
Here's an example of how to use the PEG ratio to compare stocks. A shares are trading on P/E ahead by 15 and is expected to grow by 20%. Shares B are trading at 30 P/E forward and are expected to grow at 25%. The PEG ratio for Stock A is 75% (15/20) and for Stock B is 120% (30/25). According to the PEG ratios, Shares A is a better purchase because it has a lower PEG ratio, or in other words, you can buy future revenue growth at a relatively lower price compared to Shares B.
Number of eternal methods
The PEG ratio is a special case in the number of perpetual method equations (SPM). A common version of Walter's (1956) model, the SPM considers the effects of dividends, profit growth, and the risk profile of an enterprise on the value of the stock. Coming from a compound interest formula using the present value of the continuity equation, SPM is an alternative to the Gordon Growth Model. The variables are:
- is the value of the stock or business
- is the revenue of the company
- is the company's constant growth rate
- is the adjusted risk rate of the company
- is a dividend payout company
Dalam kasus khusus di mana sama dengan 10%, dan perusahaan tidak membayar dividen, SPM mengurangi rasio PEG.
Additional models represent the number of styles in terms of revenue, growth rate, risk-adjusted discount rate, and book value of accounting.
Return of Invested Capital (ROIC)
This valuation technique measures how much money a company makes each year per dollar of invested capital. The invested capital is the amount of money invested in the company by shareholders and debtors. The ratio is expressed as a percent and one is looking for a percentage close to the expected growth rate. In its simplest definition, this ratio measures the investment return that management can gain for its capital. The higher the number, the better the return.
To calculate the ratio, take the pro forma net profit (the same is used in the EPS figures mentioned above) and divide it with the invested capital. The invested capital can be estimated by adding together shareholder equity, total short-term and short debt and debt, and then subtracting receivables and cash (all these figures can be found on the company's last quarter's balance sheet). This ratio is much more useful when comparing it with other rated companies.
Return on Assets (ROA)
Similar to ROIC, ROA, expressed as a percent, measures a company's ability to make money from its assets. To measure ROA, take pro forma net income divided by total assets. However, due to the very common deviations in the balance sheet (due to things like Goodwill, write-offs, discontinuities, etc.) this ratio is not always a good indicator of the company's potential. If the ratio is higher or lower than expected, one should look closely at the asset to see what could end or decrease the number.
Price to Sales (P/S)
This number is useful because it compares the current stock price with annual sales. In other words, it illustrates how much stocks cost per dollar of sales earned.
Market Capitalization
Market capitalization, which stands for market capitalization, is the value of all of the company's shares. To measure it, double the current share price with the fully diluted stock outstanding. Remember, market caps are just stock values. To get a more complete picture, see the company's value.
Corporate Value (EV)
The value of the firm is equal to the total value of the firm, as traded on the stock market. To calculate it, add market capitalization (see above) and total net corporate debt. Total net debt is equal to total short-term and short-term debt plus debt, less accounts receivable, less cash. Company value is the best approximation of what a company deserves at any time because it takes into account the actual stock price, not the balance sheet price. When analysts say that the company is a "billion dollar" company, they often refer to the total value of the company. Corporate value fluctuates rapidly based on changes in stock prices.
EV to Sales
This ratio measures the total value of the firm compared to its annual sales. A high ratio means that the value of a company is far greater than its sales. To calculate, for EV with net sales for the last four quarters. This ratio is particularly useful when assessing a company that has no income, or is experiencing tremendous difficult times. For example, if the company faces a restructuring and is currently losing money, then the P/E ratio will become irrelevant. However, by applying the EV to Sales ratio, one can calculate what a company can trade when the restructuring is over and the income returns to normal.
EBITDA
EBITDA stands for earnings before interest, taxes, depreciation and amortization. This is one of the best measures of corporate cash flow and is used to assess both public and private companies. To calculate EBITDA, use the company's income statement, take a net profit and then add back interest, taxes, depreciation, amortization, and other non-cash or one-time charges. This leaves you with a figure that is approximately how much money a company generates. EBITDA is a very popular figure because it can be easily compared between companies, although not all companies are profitable.
EV to EBITDA
This may be one of the best measurements whether the company is cheap or expensive. To calculate, divide EV by EBITDA (see above for calculation). The higher the number, the more expensive the company. However, remember that more expensive companies are often priced higher because they grow faster or because they are a company of a higher quality. Thus, the best way to use EV/EBITDA is to compare it with other similar companies.
Approximate approximation approximation
The average growth approach
Assuming that two stocks have the same profit growth, having a lower P/E is a better value. The P/E method is probably the most commonly used valuation method in the stock brokerage industry. By using a comparison company, the target price/revenue (or P/E) ratio is selected for the firm, and then the company's future earnings are estimated. The fair price of the valuation is only an estimated earnings time targeting P/E. This model is essentially the same model as the Gordon model, if k-g is estimated as the dividend payout ratio (D/E) divided by the target P/E ratio.
Constant growth approach
Model Gordon atau model pertumbuhan Gordon adalah yang paling terkenal dari kelas model dividen diskon. Ini mengasumsikan bahwa dividen akan meningkat pada tingkat pertumbuhan konstan (kurang dari tingkat diskonto) selamanya. Valuasi diberikan oleh rumus:
- .
and the following table defines each symbol:
The dividend growth rate is unknown, but profit growth can be used in place, assuming that the payout ratio is constant. [1]
Setting a high growth period is limited
When a stock has a significantly higher growth rate than its counterparts, it is sometimes assumed that the profit growth rate will be maintained for a short time (eg, 5 years), and then the growth rate will return to the average. This is probably the most rigorous practical approach.
While these DCF models are commonly used, the uncertainty in these values ​​is hardly ever discussed. Note that different models for and therefore very sensitive to the dividend growth difference against the discount factor. One might argue that an analyst can justify any value (and that would normally be one close to the current price supporting his call) by refining the growth/discount assumption.
Implied growth model
One can use the Gordon model or a limited period of high-growth approximation model to imply an implied growth estimate. To do this, one takes the average P/E and the average growth for the comparison index, using current (or advanced) P/E of the relevant stock, and calculating what growth rate will be required for the two equations of assessment to be equal. This yields a "breakeven" growth rate forecast for the current stock P/E ratio. (Note: we use non-dividend earnings here because dividend policies vary and may be influenced by many factors including tax treatment).
Accelerated growth acceleration rate
Furthermore, one can share this calculated growth estimate with recent historical growth rates. If the resulting ratio is greater than one, this means that stocks will need to accelerate growth relative to recent past historical growth to justify current P/E (higher values ​​indicate possible overvaluation). If the resulting ratio is less than one, it means that the market expects growth to slow this stock or that the stock can maintain current P/E with lower than historical growth (lower value indicates potential undervaluation). A cross-share IGAR comparison in the same industry can provide an estimate of relative value. The average IGAR across industries can provide expected relative forecasts of change in industry growth (eg market expectations alleged that industry will "take off" or stagnate). Naturally, any difference in IGAR between shares in the same industry may be due to differences in fundamentals, and will require further specific analysis.
Maps Stock valuation
Market criteria (potential price)
Some people feel that if the stock is listed on a well-organized stock market, with a large volume of transactions, the market price will reflect all information that is known to be relevant to stock valuations. This is called an efficient market hypothesis.
On the other hand, research conducted in the field of behavioral finance tends to show that deviations from fair prices are rather common, and sometimes quite substantial.
Thus, in addition to fundamental economic criteria, market criteria must also take into account market-based valuations. Assessing a supply requires not only an approximate fair value, but also for determining a potential price range , taking into account the behavioral aspects of the market. One tool for behavioral assessment is the stock image , the coefficient that bridges the theoretical fair value and market price.
Keynes Views
In the view of the famous economist, John Maynard Keynes, the valuation of shares is not an estimate of the fair value of the shares but rather to the convention, which serves to provide the necessary stability and liquidity for investment, as long as the convention is not damaged :
- Certain investment classes are set by the average expectations of those dealing with the Stock Exchange as revealed in the stock price, not by the original expectations of the professional entrepreneur. Then, how is every significant daily revaluation, even every hour, done in practice?
- In practice, we secretly agree, as a rule, to back off on what is actually a convention. The essence of this convention - though not, of course, works so simply - lies in the assumption that the existing situation will continue indefinitely, except insofar as we have specific reasons for expecting change.
- ...
- However the above conventional calculation method will be compatible with the size of continuity and stability in our affairs, as long as we can rely on maintaining the convention....
- Thus the investment becomes sufficiently "safe" for the individual investor during the short period, and therefore during the short but many periods, if he can reasonably rely on no interference in the convention and therefore he has the opportunity to improve his judgment and change his investment , before there is time for many things to happen. The 'fixed' investment for the community is made 'liquid' for the individual.
See also
References
Source of the article : Wikipedia
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