Introduction
An investor buys shares by resorting to different approaches to validate his investment to reap rich profits. Before investing, it is necessary for an investor to know how to analyze prices of stocks by reading financial statements of an enterprise. The idea of learning to analyze prices of stocks y reading financial statements is to buy shares at Companys intrinsic value. Buying shares at companies intrinsic value ensures greater return even in case when the company goes brankrupt and reaches a point of liquidation. Liquidation is nothing but worth of companies asset as sold during bankrupcy.
Fundamental analysis of a business can depend on various factors:
The most common factor known to investors is efficient market theory, value and growth, model theory, etc.
1. The theory of efficient markets for stocks believes that the stocks are always priced correctly. The market price of stocks always builds up its value (up and down) immediately on basis of informations available in the market.
2. The grant establishes the price.
3. Analysts comment on the value of a company based on the potential for growth.
4. Price and value can be equal, because of certain irrationalities governing the market.
Value investors need to rely on some strict rules that govern the nature of actions that meet the following criteria:
1. Earnings: Earnings are the Corporate profits after taxes and interest.
2. Earnings per share (EPS): the amount of income saved (based on per share) available to the Company from paying dividends to shareholders or reinvest in itself.
3. Price / ratios (P / E) ratio (having a justified upper limit): If the stock of the company is trading at $ 80 and its EPS is $ 8 per share, it has a multiple, or P / E of 10 . This means that investors could expect a cash return of 10% flows:
8 $ / $ 80 = 1 / 10 = 1 / (PE) = 0.10 = 10%
If she is making $ 4 per share, it has a multiple of 20 (20 times $ 4 equals $ 80). In this case, an investor could receive a 5% return (in the same conditions);
4 $ / $ 80 = 1 / 20 = 1 / (P / E) = 0.05 = 5%
However, a low P / E ratio is not an indicator of the value intact.
4. Price / Sales Ratio (PSR): is the same as a P / E ratio, except that stocks are divided by sales per share instead of earnings per share.
5. Debt: Percentage of debt a company has relative to equity.
6. Dividend yields: above a certain absolute limit.
7. Book value ratio: comparison of market price to book value per share of stock.
8. Market capitalization: Completed total value of a companys share outstanding (market price per share Number of shares outstanding).
9. Return on Equity – ROE: Net income after tax divided by shareholders.
10. Beta: Comparison of volatility of the stock-market.
11. Institutional ownership: percentage of firms outstanding shares held by certain institutions: insurance companies, mutual funds, etc.
Learn how to analyze prices of stocks and therefore getting desirable benefit is an ongoing process. Because no amount of theory of efficient market can never provide a seamless system of financial return. Even if one invests judiciously by studying the market, the overvaluation or undervaluation of stocks can often be determined by the investors emotions driving the stock market.
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