Halal Investment Series Part 15
Valuation measurements are ratios and models that can help investors determine how much a company is worth. Some are solely based on the company’s financial statements, while others compare the market price to the company’s per-share statistics. Typically, investors should use two or three ratios to determine how a company compares to its peers, as well as whether it is trading above or below its fair value.
However, valuation models and ratios are not foolproof, they do provide an idea of what is required for a stock to provide a return. If a stock is very expensive, it will need to produce two or three years of strong earnings growth before the market price will rise further. There is probably a reason why a stock is trading at a discount to its fair value. without a doubt, it is critical to understand why a stock is trading at a discount and what will be required for the price to rise.
Moreover, valuation measurements are extremely useful in any type of stock picking or active investment strategy. In this case, they can be used to compare stocks and choose those with the best chance of producing a profit.
Popular Valuation Metrics
- Price to Earnings Ratio (PE ratio)
- PEG ratio (Price/Earning to Growth ratio)
- Enterprise Value (EV)/EBITDA
- Price to Sales Ratio
- Price to Free Cash Flow
- Equity, NAV, and Book Value per share
- Price to Book Ratio
- Dividend Discount Model
- Discounted Cash Flow
- Sum of the Parts
Furthermore, valuation measures are done quarterly after an earnings report. It is important for investors to look at the metrics over time to get a sense of the historic movement of the stock. Undoubtedly, looking at the historical movement of the stock can give investors assumptions to follow. Below is the example of valuation measures;
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