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Examine These Key Valuation Statistics to Get the Best Returns on Investments


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By MIndyke - Posted on 15 July 2010

Valuation statistics are the driving force behind a company’s fluctuations in its price. The following measures are most commonly used when valuing investments: 
 
Price/Earnings (P/E) ratio
When less than 15, the investment is a value stock. 

  • Value stocks represent a bargain, where the company may be priced near its historical low and has high potential to increase in value in the long-term future.  
  •  Most smart investments are focused on value, making low P/E stocks (P/E < 15) more desirable.
  • Consider pharmaceutical companies like Merck & Co. and Proctor & Gamble with the healthcare industry thriving under the new healthcare bill.

When greater than 15, the investment is a growth stock. 

  • Growth stocks indicate companies with extra capacity to expand operations and serve more customers in the future.
  •  Although growth-invested companies are capable of flourishing in the long-term, the risk of investing is greater due to the likelihood of growth-related costs digging into profits and/or a greater chance of setbacks during the process of expanding.
  • Airlines like Continental and Delta are always working to improve operations for its business yet they often have financial obstacles to overcome.

Return on assets (ROA)
When greater than 10%, the company is receiving a high return on capital. 

  • The higher the return on capital, the more healthy the business.
  • Companies derive ROA from assets like technological equipment that improve the process of doing business and inventory that sells.
  • Software manufacturers like Oracle and Microsoft have received high ROA as a result of more people turning to computers and internet to run their lives.

Return on equity (ROE)
When greater than 15%, the company is deemed a well-managed business. 

  • A key to a company’s survival is having a solid and established management team that knows how to keep the business financially afloat.
  • High ROE varies from industry to industry as two companies being compared in one industry can have very different management styles from one another.
  • If ROE is your top benchmark used for valuing investments, dig into the company by examining resources like annual reports and management comments.

Price/Book (P/B) ratio
It is best to look for companies with a ratio no higher than 1.2 even though most stocks often trade at a price much higher than book value.

  • The lower the P/B, the cheaper and more undervalued the business.
  • Value stocks are contained in a low P/B ratio where the company is priced at a value less than the book value of its assets.
  • Banking industries like Morgan Stanley and JP Morgan Chase have are one good bet, given their struggles in the recent economic downturn.

Ways of Filtering the Statistics
Yahoo Finance Stock Screener allows you to choose a combination of conditions under which to find and select investments based on various criteria. To search for stocks with P/E < 15, select the Criteria box on the top left, scroll down to Valuation, and select P/E on the pop-up screen to the right. In the Condition box at the center, click and select <= on the pop-up screen and type in the number 15 in the Values box on the right.

 
ROA and ROE can be found in the Profitability box under Criteria and P/B can be located under Balance Sheet on the Criteria list. After selecting the criteria, follow the same steps for Condition and Values described above for P/E. In the section under the Criteria box, you can select how many results you want the search to return depending on how big you want your selection.
 
When the stock screener search runs, all stocks will be sorted from highest market capitalization to lowest. However, you can click onto the name of any statistic in the results area if you want to sort the investments from high to low or vice versa. The screener likely sorts data based on market capitalization because searchers will immediately notice big-name companies. The higher the market capitalization, the bigger the company and the more familiar the name to the average investor.
 
Any further questions, please contact me by email at matthew.indyke@gmail.com

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