What is meant by the term valuation in stock markets?How to valuate a company?
What is meant by the term valuation in stock Markets?How to valuate a company?
This is not an easy question to answer. There are various methods that are employed. Discounted cash flow is the most popular currently. It does however suffer from one really big problem. That is attempting to determine what the cash flow is likely to be. That does not prevent all of the discounters from the attempt. The way it works is projecting the future cash flow of the company out for the foreseeable and even the non-foreseeable future and discounting it to the present and then comparing it to the current price. Morningstar loves doing that and they are not the only ones. S&P also partakes of that strategy.
A strategy that I like because it is fairly simple is to compare the current PE of the company to the historical (last 10 years) for a company with a consistent earnings record. For example WMT. Its PE ratio has varied between 13 and 56 during the last 10 years. It has been a consistent earnings performer and has also been a consistent dividend payer and dividend raiser. Its current PE ratio is about 14 very near its ten year low. Seems to me to be a BUY.
2 Responses to “What is meant by the term valuation in stock markets?How to valuate a company?”
Wow! That is a complicated question!! There are tons of books written on this very subject and most of them don't agree. The basic term valuation is how to determine the actual amount a company is worth. This is also referred to as the "intrinsic value." Any price above this and the stock is over valued, any price under and it is under valued. One of the most famous books written on the subject is "Security Analysis" by Benjamin Graham and David Dodd. It's a good start, but be prepared to sit down and really dig through a textbook. Good luck and if you ever get a definite answer, let me know!!
Comment made on May 27th, 2009 at 6:59 pmReferences :
This is not an easy question to answer. There are various methods that are employed. Discounted cash flow is the most popular currently. It does however suffer from one really big problem. That is attempting to determine what the cash flow is likely to be. That does not prevent all of the discounters from the attempt. The way it works is projecting the future cash flow of the company out for the foreseeable and even the non-foreseeable future and discounting it to the present and then comparing it to the current price. Morningstar loves doing that and they are not the only ones. S&P also partakes of that strategy.
A strategy that I like because it is fairly simple is to compare the current PE of the company to the historical (last 10 years) for a company with a consistent earnings record. For example WMT. Its PE ratio has varied between 13 and 56 during the last 10 years. It has been a consistent earnings performer and has also been a consistent dividend payer and dividend raiser. Its current PE ratio is about 14 very near its ten year low. Seems to me to be a BUY.
Comment made on May 27th, 2009 at 7:37 pmReferences :
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