[1] Price to Book Ratio (P/B)
- Book Value = Total Asset - Total Liabilities It is net equity position left overwhen everthing in a company owes is taken away from what it owns.
- Price to Book = Stock Price / Book Value per share.
- Intangible asset wort nothing than its book value e.g. goodwill and patents. Some investor remove it and make the conservative Price to Net Tangible Asset
- Book value doesn't rely on volatile measure like profits and has a hard accounting foundation in company's books - it is key barometer of value by academics
- Most value investors try to buy stocks at a discount to their book value (P/Book ratio < 1). This may not applicable to asset liht company which its value depend on its earnign power.
- [Note]: Further Readings: Benjamin Graham Net Net & Negative Enterprise Value.
[2] Price to Earning Ratio (P/E)
- Price to Earning = Stock Price / Earning per share It show how expensive or cheap a share is compared with its profits
- Some value investor's take on the Cyclically adjusted P/E (CAPE) - Stock Price/Average (EPS over a cycle of 7-10 years) Current earnings can be overly inflated due to a business boom
- P/E < 10 = Good, < 5 fantastic, > 20 too expensive It all depends on the industry and growth prospect of the company
- Shortcoming: P/E not consider debt. It is difficult to compare companies with different leverage
[3] Earning Yield (EY)
- EY = The inverse of P/E = E/P
- It is a great improvement - it can be compared with other investments more easily (e.g. FD)
- Joel Greenblatt redefined EY and introduce the Magic Formula. EY = Operating Profit after Tax / Enterprise Value = EBIT*(1-Tax Rate)/(Maker Cap + MI + Total Debts - Excess Cash - Other Non Operating Assets)
- EY = 10% ok, EY >=15% Good, EY > 20% = Fantastic
- Shortcoming: It does not take into consideration of the growth of company.
[4] PE/Growth Ratio (PEG)
- PEG = PE / Forecast EPS Growth Rate
- It was popularised by Peter Lynch.
- It tends to focus on the growth prospects of a company and buy it on cheap, which aren't necessarily vital to a value hunter.
- PEG < 1 - a resonable price ofr a signifies growth.
- Shortcoming:Earnings are just accounting numbers and they are subjective.
[5] Price to Free Cash Flow (P/FCF)
- P/FCF = Stock Price/ Free Cash Flow
- Looking at hard cash can prevent account manipulations.
- Read Cash Flow Statement Analaysis to if you would like to know what is Free Cash Flow.
- P/FCF = 20 is reasonalbe (as it is hard cash), P/FCF = 15 is good, P/FCF < 10 is fantastic price.
[6] Price to Sales Ratio (P/S)
- P/S = Stock Price / Sales per share
- For company that have no earnings e.g. Technology Company during dotcome euphoria @ late 1990s.
- It have a bad name when it was misusd in dotcom bubble to justify nosebleed valuations.
- Earning can vary from year to year, sales are much more sable. It serve as a key indicator for isolating potential turnaround stocks.
- Low P/S stocks (especially against their sector) can often be stocks that bounce back very quickly as they return to profitability.
- Look out stock with historically reaonable margins trading on P/S < 0.75 wihtout much debt.
Which method to use?
- P/E - consistently profitable company
- P/FCF - more consistent cash flow than profit
- P/S - company with no earning
- P/B - no sale to speak of but do have hard assets
- PEG - pricier but cheap for their growth
References:-
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