How To Evaluate Stock

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Before investing in any kind of stocks and shares it is very important that you evaluate them thoroughly. This is more important in today’s volatile market scenario. You can use many different tools, methods and ratios to evaluate stock. There are also many websites on the internet that will assist you with the same. This article will give details on all these ways and tell you how to evaluate stock using these methods.

How to evaluate stock using ratios

There are number of ratios that can help you to assess how well a company is performing and if it is worthwhile to invest in its stock. Here are some of them:

1. Earnings per share

• You can calculate earnings per share by dividing the net profit after tax by the number of shares that are on issue.

• A higher figure indicates better share value.

• The ratio also indicates the growth in total earnings from the current to the next year.

2. Price-Earnings Ratio

• This ratio is calculated by dividing the share price by the earnings per share.

• It tells you how many years it would take you to buy the share based on its earnings.

• A higher ratio means a greater premium to be paid and greater expectation of high company growth in the market.

• A lower P/E ratio implies low growth for the company in the future.

3. Dividend yield

• Dividends are another important factor in determining the performance of a company.

• A lower dividend yield is considered better as it reflects a higer capital growth for the company.

• However, make sure that the low yield is not because of a steep drop in the price of the share.

4. Dividend payout ratio

• This ratio is calculated by dividing the dividend per share by the earnings per share.

• Generally this ratio is around the 60% ...

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...he past, it is more likely to face similar situations better in future and you can invest in its stocks.

• Moat

A moat is the economic advantage a company has over others in the market. Some good examples are Walmart and Starbucks. These brand names give them an advantage over other companies.

• Market Cap

A market cap is the number of sales a company is able to generate in a year. Invest in a company’s stock only if its market cap is higher than a hundred million or more.

Tips:

• The price to earnings ratio (P/E ratio), calculated by dividing the share price by the company’s annual net income, is the most commonly used measure for evaluating a stock.

• Stocks having a higher P/E ratio than the market are considered to be more expensive.

• However, don’t go for stocks giving low P/E ratio because even though they are cheap they might not be good stocks.

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