Money Forum World

how to judge the rate of stock on stock market as to if it's over valued or under valued, by going through their balance sheet &amp, profit &amp, loss?
EPS / PE percentage has something to do with the valuation

I strongly recommend you read, Security Analysis, by Benjamin Graham, the 1934 edition which is available at most big chains or the modified variant by Sydney Cottle.

PE is usually the most used way. Now the S&amp,P is trading around 17 times income which is a bit higher than average. The economy is weakening, corporate profits are not growing as fast, and the yield curve is still inverted which leads me to believe we have softer economic times ahead of us, and our stock market PE doesnt accuratly reflect that.

Corporate balance sheets, interest rates, and all economic factors should also be looked at when judging if or not the market is under/over valued.

The PE percentage is just the Price of the stock over its income Per Share.

Its like saying in how many years will I be paid back for purchasing the stock.

Example: Stock costs $ 20 and has EPS of $2 it has a PE percentage of 10. If the company passed to you the $2 every year to pay you back it could take ten years.

Making a motivation of if its under/overvalued is related to how that company is doing compared to the business that they're in. different industries have different PE percentage ranges.

Emerging industries and particularly high tech have high PE ratios and stable mature industries have low PE ratios.

High Tech firm: Price is $ 45 and EPS is $ 0.75 it could have a PE percentage of 60. But maybe someone feels it'll pay off at some point.

Actually, I could say that P/E is one of the most overhyped ratios for evaluating a stock. Price doesnt include a debt or cash position Enterprise Value the market cap. minus cash and equivalents plus lasting debt should be used instead.
Also, Earnings hardly gives an correct picture of how well the company is doing, because it's greatly reliant on managements accounting methods and subject to all kinds of one time gains and losses. The better measure to use is adjusted free cash flow. If you follow the substitutions, you may want to be using EV/FCF instead of P/E. Its a more involved, but I believe, the bit of extra work involved in finding it are totally worth it.
Here is an example of what I mean by the difference between income and free cash flow. It uses Google GOOG for example. .. valuestockreports.com/022507..

BTW: Going by EV/FCF, I think the Dow is considerably overvalued.

Dont base your investment decisions Exclusively on valuation.

Stocks may remain overvalued/undervalued longer than you may be able to remain solvent.

Visit this link buzzingstocks.com/in/analysis.