How to evaluate a stock

 

Financial ratios are important in evaluating the stocks.

   The two important steps in evaluating stocks:

·        Evaluation of Business Health

 

·         Evaluation of stock’s price

 

Financial ratios fall into two broad categories:-

1.       Ratios for Price Valuation

a)      PE ratio

b)      PB ratio

c)       PEG ratio

d)      Dividend yield

 

2.       Ratios for Profitability check

a)      RoCE ratio

Steps in evaluating the stocks

1.       Prepare a list of of top stocks

2.       Calculate following the values for each of the stocks

a)      Market cap

b)      PE ratio

c)       PB ratio

d)      PEG ratio

e)      Dividend Yield

3.       Check profitability of Business

How well the company is utilizing its funds to run its business

RoCE (Return on Capital employed) ratio: High RoCE means company is strongly positioned to produce the same level of earnings in future.

Summary:

When buying stocks, choose companies with strong Business fundamentals and undervalued share price.