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 Fair Value of a Company, Newbie

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TSbylkw2
post Jan 10 2019, 05:49 PM, updated 6y ago

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Hi all, when we look at the current price of a company, how do we know if it is undervalued, neutral or overvalued, and the "fair value" of it?

Below are the benchmark or tool I read and understand that people use to evaluate the price, please share if they are correct, or share yours:

a) p/e ratio of it, and how it against the industry's p/e ratio
b) minus the total assets with total liabilities, then divide the equity value with total number of shares

thank you a lot for helping out newbie
ILoveLalat.net
post Jan 10 2019, 09:03 PM

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Not familiar with part B but I can briefly explain on part A.

So basically, P/E ratio should not and all be not measured across the entire industries. Consider this, the energy industry (oil, natural gas etc.) majority of them historically have a low P/E ratio compare to say the technology sector (semiconductors, electronic manufacturers).

But even when breaking down the components, each particular sub-industry may have a higher risk than the other sub-industry of the same grouping. So, you will want to compare apples to apples rather than apples and oranges. Hope this helps!

Singh_Kalan
post Jan 11 2019, 12:42 AM

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Actual fact is there are way too many parameters involved in valuation. P/E is just one of it. You also got P/B, FCF, Debt/Equity, Quick Ratio, Dividend Yield, effects of dilution, historical earning & dividend growth and size of company thru market capitalization. Its a combination of parameters. Ignoring either one of the parameter may give a wrong valuation.

To sum it up, its not easy for beginner to be successful in picking individual stock. Most of them will end up losing money. Best way is still thru ETF or UT. Another important hints for beginner is never trust the target price from analysts.

This post has been edited by Singh_Kalan: Jan 11 2019, 12:59 AM
ferd0123
post Jan 11 2019, 12:51 AM

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In business valuation, there are three approach used in determining fair value
Income approach
Market multiple
Asset based approach

Normally using income approach with discounted cash flow method, this method is by getting the present value of expected cash flow of the business, market multiple is comparing p/e ratio with same industry and asset based is by adjusting all account to market value at valuation date.

 

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