How To conclude The Value Of A Stock

#1. How To conclude The Value Of A Stock

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How To conclude The Value Of A Stock

Stock prices are driven by a company's earnings and the information impacting the prospects of a company's time to come earnings. It is the singular most prominent factor when valuing a stock. I cannot stress this enough; determining what a stock should be trading at is wholly dependent on a company's earnings and its potential to withhold or growth its earnings in the future.

How To conclude The Value Of A Stock

"How To Trade Penny Stocks Online":

Background

Companies issue earnings reports on a regular basis typically in January, April, July, and October. These reports supply indispensable information for valuing the price of a stock, and it is tasteless to see major movements in a stock's price immediately following an earnings release. Also at this time most clubs will supply forward advice indicating what the firm expects to earn while the next quarter.

Several key statistics can be verily derived from a company's earnings report, along with a company's net earnings and a company's earnings per share.

Definitions

A company's earnings per share is equal to the company's net earnings over the total amount of shares outstanding.

Earnings Per Share = (Net earnings - Dividends on preferred Stock) / (Average excellent Shares)

The P/E ratio (price-to-earnings ratio) commonly referred to as the manifold and is equal to the stock price over the company's annual earnings per share.

P/E Ratio = Current Stock Price / annual earnings Per Share

Conversely, the F P/E ratio (forward price-to-earnings ratio) refers to the current stock price over a company's forecasted next years annual earnings per share

F P/E Ratio = Current Stock Price / Forecasted annual earnings Per Share

Valuation

The Pe ratio is a key metric, which indicates how much investors are willing to pay for a company's current earnings. At a basic level the higher the Pe ratio is the more high-priced the stock is. However, stocks are not traded based on their current earnings, but based on their forecasted time to come earnings. In other words, a company's worth is not equal to what it is making today, but what it is making tomorrow.

Value Stocks

Value stocks are plainly stocks traded at low Pe ratios. These stocks typically have much lower growth rates meaning that their earnings are foreseen, to growth at a much slower rate, typically less then ten percent annually. It is prominent to note that value stocks have outperformed growth stocks over the last ten years. One example of a value stock is Exxon Mobil Corp, which currently trades at 12.3 times earnings.

Growth Stocks

Growth stocks trade at high Pe ratios because they are trading entirely on time to come earnings and not on current earnings. These are clubs whose earnings are foreseen, to grow substantially in the future. Investors are willing to pay more for clubs who can generate higher returns in the future. As growth stocks are very much driven towards time to come earnings, a growth firm who reports lower then foreseen, earnings may drop substantially on the news. One of Jim Cramer's rules is to never buy a stock which trades above twice its growth rate. This means that if a firm is only foreseen, to grow at 10 percent and is trading at a manifold of 20 then he considers the stock expensive. One example of a growth stock is Transoceans who currently has a 205 percent growth rate; however, Transoceans may also be determined a value stock as it only trades at 10.8 times current earnings.

Stocks with Accelerated earnings Growth

Stocks whose time to come earnings are increasing, meaning the company's earnings are foreseen, to not only grow but to continually grow faster, deserve a very high Pe ratio. These are very risky stocks, but can supply huge returns if their growth rate continues to increase.

Conclusion

When valuing stocks it is prominent to remember not only current earnings but time to come forecasted earnings. We want to fetch stocks that have low multiples compared to their time to come projected earnings. This means we want to always be on the look out for stocks, which have forward growth rates above their current multiples. Also it is prominent to keep up with the news, seeing for things that may impact a company's current or time to come earnings.

Disclaimer

It is not enough to fetch a stock in a firm based solely on earnings. There are many factors that may impact a company's performance. This is just one of the many key metrics I use to value a company's current stock price.

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