By Arjun Chandrasekar.
Analyzing stocks is an important tool for investors to learn; in order to find high-potential stocks, they need to know the basic metrics and how to utilize them. There are two types of stock analysis: fundamental analysis and technical analysis.
Fundamental analysis is primarily used for long-term stocks where you make assumptions on the stock price versus its intrinsic, or fundamental, value.
Technical analysis is used to identify patterns and trends of a stock over a fixed period of time. To conduct a technical analysis take all available information and analyze the stock’s history, overall long-term trends, and overall short-term trends. This will enable you to make a prediction about its future movement.
Some of the general, easy-to-understand points to look at include market capitalization, revenue growth, earnings yield, and historical trends. These are all available on Yahoo Finance or Market Watch, and the majority of beginner investors simply check these values off to make a quick judgment on whether or not they should invest in the stock. While noting these values is important, we recommend looking at more specific ratios and key data points which we will talk about below.
Key Data Points
Here are some of the important data points investors should look at when analyzing stocks.
First, the P/E (price to earnings) ratio. To calculate this value, you take the company’s share price and divide it by its EPS (earnings per share). This will allow you to notice whether a stock is undervalued or overvalued, and how it might change in the coming months.
Second, the P/B (price to book) ratio. The “book” is a practical measure of a stock’s net value. To calculate this, divide the company’s stock price per share by its book value per share. Normally, any P/B ratio value under 1.0 is great because it indicates that the stock is undervalued, meaning it is more than likely going to experience growth.
Third, the PEG (price to earnings growth) ratio. This is a simple measure of a company’s growth rate, and to calculate this value, we divide the P/E ratio by the annual growth rate. Similar to the P/B ratio, a value of 1.o is considered good for PEG ratios because it again suggests that the stock is undervalued.
And finally, the debt to EBITDA (earnings before interest, taxes, depreciations, and amortization) ratio. This value provides investors with insight into the short-term future. High debt to EBITDA ratios indicate higher-risk, so look for values of 3.0 to lower.
Normally, it’s best to compare stocks within the same industry or field as they are highly comparable. For example, comparing Tesla to Lowe’s would not be wise because Tesla creates electric vehicles and sustainable energy products, while Lowe’s is in the home improvement/supply industry.
To fully analyze stocks using these 4 values, you can make a spreadsheet or table and plug them in. This gives you a side-by-side view of the differences between the stocks and will allow you to then make a based assumption on whether you should invest in them or not.
Overall, analyzing stocks can help investors find proper, high-potential investments to make while also possibly finding other investment opportunities they previously didn’t know about. The methods listed throughout this blog can allow you to place yourself in an optimal position to beat the market.
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