Price and Value Fundamentals

A dictionary like blog containing all the price and value based fundamentals one should take note of before investing in a stock.

Current Market Price: This is called the CMP, as the name suggests, It is the current market price of a stock denoted by P_latest.

52-Week High/Low: This is the highest price at which the stock traded and the lowest price, by looking at this metric one gets a good idea of the volatility of the stock. If the CMP = 100 and the 52 high = 120 and 52 low = 80, then by looking at this we have a nice understanding of how the stock’s volatility is looking. Also, a stock performing near to the 52-week high is performing well, and similarly, a stock near the 52-week low is performing not well. Usually, the 52-week high and low can also be seen as support and resistance levels.

Market Capitalisation: The calculation of this is just CMP * no of stocks in market, but this is a very important metric. Usually, stocks more than 100000 cr market cap are considered large cap. Remember that the top 100 stocks by market cap are large cap, then 100-250 are mid cap and 250 and beyond are small cap.

Enterprise Value: It is the total money needed to acquire 100% of the company. By looking at the market cap alone, one cannot really see how well the stock is doing. This is when the EV comes into play, EV = Market cap + debt - cash. Even though some company has a very high market cap, if it has high cash, the EV or the actual price of buying the whole company is low. Let’s say A and Bhave 100 as market cap. If A has 100 as debt and 10 as cash, then EV = 100 + 100 - 10 = 190, and say B has debt = 10 and cash = 100, then EV = 10. So here, B is a less risky investment even though market cap is the same.

Enterprise Value per Share: So share price is market cap / total shares in market, similarly here EV / total shares in marketis the EV per share. This is a better metric because EV has both debt and cash accounted for, so when the market overvalues or undervalues stocks, EV per share will give a better estimate and signal than share value.

Intrinsic Value: The actual value of an asset, so comparing it to the market we can tell if something is undervalued or overvalued. The model for intrinsic value calculation is complex, and mainly we use something called the discount cash flow (DCF) method to calculate this. Now this method is very interesting. Basically, say we know that for the next 10 years the cash flow is going to be 200 dollars. Then for every year, we have cash flow = 200 * (1 + growth rate)^n / (1 + discount rate)^n, where the discount rate is the risk-free rate. Now after calculating this for n years, we add all the values till the last year. Say if 10 years, then we do this calculation 10 times with n = 1, 2, 3…10. After this, what we do is very interesting: we multiply the P/E ratio with the 10th-year calculation as we want to calculate this for infinite years, then we add that too here, and lastly, we add all the values to get the intrinsic value of the stock. Note here that if this value is more than the stock value, then it is considered a good investment.

Book Value: Mathematically, this is Total assets - Total liabilities. Book value is how much the investors will get if the company is liquidated. Usually, this is just a value. I don’t see how well this can be used. I think if this is negative, then the investment is risky, but still, one never knows.

Tangible Book Value: So tangible is the things that one can physically touch, and here if we have the tangible assets - liabilities, then we get the tangible book value. The money the company will be left with if it decides to sell off all the tangible assets to make the liabilities zero. If the company goes bankrupt, then they would have to sell all the assets to make liabilities zero. Here more the tangible book value, the better and safer is the investment.

Price to Book (P/B) Ratio: Current stock price per share / current book value per share. Basically, it is the market valuation of the company relative to book value. So if the market value is too high compared to the actual value of the company (book value). Usually, the market value is higher than the actual value, but P/B of 1.0 or lower is good and a nice investment. Here the ROE or return on equity comes in handy, as net income / shareholders equity, we get the returns on the equity. More the ROE, the better the company is at generating income. Usually, ROE and P/B ratio go hand in hand. So when ROE is high, the P/B is also high. If the P/B is very high but ROE is not very high or even low, then this means that the stock is overvalued in the market and is not a wise investment.

Earnings per share (EPS): This is calculated with net income of the company - preferred dividends, and then divided by the total shares. The Earnings per share is how much the share earns. More the EPS compared to the sector of the stock, the better it is and is considered a good investment.

Price to Earnings (P/E) Ratio: Price per stock / earnings per stock (EPS). A high P/E can mean one of the two things: either the company is overvalued (there are other ways to check this) or the investors are expecting high growth returns. There are two ways to use the P/E ratio. First, make sure the stock is not overvalued. Then now, either you can see the historical P/E value and compare it with past years, or you can also compare the P/E ratio with other companies in the same segment.

Forward P/E Ratio: How much are the investors willing to pay for future earnings of 1 rs. This question is answered by the forward P/E ratio. It is the stock price / forecasted earnings per stock. The banking sector has a forward P/E of 16 as a good mark, but the healthcare sector 133 is good. Just make sure to see the sector P/E, and also note if we are expecting the earnings to increase, forward P/E will be less than P/E.

Trailing P/E Ratio: This is a very absolute and accurate metric. It is the stock price / past 12-month earnings per share. Usually, we compare it with the sector P/E. This can also tell us if the company is overvalued or not.

Price to Earnings Growth (PEG) Ratio:PEG = (P/E) / Earnings growth rate. The earnings growth rate is the EPS (t) / EPS (t-1) - 1. So it makes sense that if PEG > 1, this means that the stock price is more than the difference in earnings. This just means that the stock is overpriced. The most ideal case is that PEG = 1, or the stock price and earnings are correlated. When PEG < 1, it is a good time to buy as the stock seems undervalued.

Price to Sales (P/S) Ratio: This is how much investors are willing to pay per 1 rs of sales. This is just the market capitalisation / sales. Here one thing to note is that every sector will have a different P/S ratio. Within a sector, say X has 0.48 P/Swhile Y has 0.51. This means that investors are willing to pay 0.48 rs for every 1 rssales, and this means that X is a better investment within the sector as it is more undervalued than Y. Usually, P/E value less than 1 is considered undervalued and a good investment.

Price to Cash Flow Ratio (P/CF): This is an interesting ratio. This ratio is just the price per stock / net cash flow per stock. The cash flow is earnings (net income) with non-cash expenses such as depreciation and amortization. So this means that if a company has a high depreciation expense, then its P/CFwill be much lower than P/E. This is why some people prefer it over P/E. Keep in mind that this P/CF ratio of less than one is generally a good sign of the stock being undervalued.

Price to Free Cash Flow (P/FCF): The Free cash flow is the cash flow - CAPEX (capital expenditure). This is good as it reflects actual cash for non-asset growth. Relative to the sector, a lower value means that the stock is undervalued and is a good investment.

Price to Innovation Ratio: This is the market cap upon the R&D spending. The R&D or Research and Development is the money spent on research and innovation. A lower value of this ratio compared to the sector value means that the company is investing more in R&D.

EV/EBITDA: Okay, so the EBITDA is the operating profit + depreciation + amortisation. The EV/EBITDA is a better metric than P/E as it has the other components in account and is also tax neutral. A value less than 8 is considered good. Good vale is deepened on the sector average.

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