How does one confirm that the value of a share is within reaonsable boundaries?
Question:
1) Type of business (eg oil and gas exploration etc)
2) Annual turnover and other financial performance data including earnings per share etc
3) diversity
4) dividend history
5) etc
Please don't be shy with the math - I'll take mathamatically complex answers on the chin ...
There must be a way of converting fundamental analysis into numbers - can anyone lead me in the right direction?
Answer:
A rule of thumb is to apply the PEG ratio. PEG ratio measures the price and PE of a stock relative to its growth rate. For example, if a stock is capable of growing earnings at 20%, its fair value is 20X. If it is 15%, it is 15X etc etc.
The problem is a lot of stocks are fairly expensive these days. It is not unusual to find stocks that sell at 15-20X but only growing at 5-10%.
Conversely, if you can find stocks nowadays trading at PEG<1 and it is a decent and financially solid company, it is worth looking more into it.
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Apart from PEG, you can also compare the PE, enterprise value/sales, EV/EBITDA ratios to its peers.
The closer the share is in price to its book value or core value.. the closer it is to its reasonable boundary.
Big name stocks and whats hot today are way over their estimated book value.. that is way away from reasonable boundaries.
That is it in a nutshell.
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