How to Assess the Worth of Stocks
Based on what I read, every investment vehicle is competing with each other. Here’s an instance. In the present status,
Treasury bond – 5% annual return
*EDC stocks – 8.07% year end return
If you have cash that you want to invest, which of the over will you choose? Definitely, you must select EDC since it may give you an 8.07% profits assuming it may acquire the similar amount every coming year.
Anyhow, how could you be familiar with how much is the value of holdings compared to Treasury bonds? Note that I compared holdings against Treasury bond since T-bond is a low danger investment. Here is the example to give you an idea,
EDC EPS (current earnings per share) = 0.49
Relative stock value of EDC = 0.49/0.05 = Php 9.8, where 0.05 is the T-bond return per year
To explain this equation further, if you will purchase EDC for Php 9.8 per share, it will be entitled to the same amount if you invest in Treasury bond. For that reason, if you will buy EDC, you should buy it at amount lower than 9.8 otherwise it is more appropriate to invest your cash in Treasury bond that is small danger!
However you know that holdings are superior danger. So the key for that is “margin of safety” if you desire to still entrust in stocks. Point, you will purchase your prospect holdings with 30-50% discount compared to the Treasury bond.
If you are risk averse, you choose greater discount rate. In my example, if you work with margin of safety of 35% then I will purchase this stock at Php6.35 per share. However, we need also to response this inquiry: Will this company boost its income in the future? Because if not, then the earnings may go down and so its stock value.
So how will you learn if there’s a potential growth or at least keep its current income?
1. Check the record. Of course previous performance doesn’t guarantee the future but it is a good assessment of the company management’s competency.
2. Upcoming growth plans. What are the firm’s plans for expansion?
3. Competition. Do they have many competitors? What is the firm’s benefit over their competitors?
Earnings per share (EPS) and Treasury bond allotment revenue may be a great way to assess the worth of a stock. Nevertheless, there are different factors involved in choosing a beneficial stock. Some of the criteria you may work with to gauge the profitability of a stock are cited above. You may beef up more criteria relying on your preferences and venture principles.
Gil Tenorio loves blogging on finance, saving and investing. He loves playing guitar and gardening. He resides in Korea with his family. To get more details on how to invest in Philippine Stock, feel free to visit to Financial Management, for free financial management articles on saving, investments and earn money online.
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