In a previous article, I discussed the traditional and “textbook” method for valuing a stock, along with a few modifications to smooth out the inherent bumpiness in levels of cash flow. In this article, we’ll take a look at another common way of valuing a stock, using statistical multiples of a company’s financial metrics, such as earnings, net assets, and sales.
There are basically three statistical multiples that can be used in this kind of analysis: the price-to-sales (P/S) ratio, price-to-book (P/B) ratio, and price-to-earnings (P/E) ratio. All of them are used the same way in doing a valuation, so let’s first describe the method and then discuss a bit about when to use the three different multiples, then go through an example. Watch video in link below
video link : http://wp.me/p8HeNU-1tB
Valuing a stock in a multiple-based manner is simple to understand, but takes some work to get the parameters. In a nutshell, the object here is to come up with a reasonable “target multiple” that you believe the stock should reasonably trade at, given growth prospects, competitive position, and so forth. To come up with this “target multiple”, there are a few things you should consider:
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