How to Value Stocks

So just how do you value the shares of a company? Should you look at earnings, revenues, cash flow, or something else entirely? Do you need to apply one or several valuation methods to discern what the fair price for a share of stock would be?

In this series of informative articles, Fools can learn many ways to value a company's shares, as well as helpful methods to determine whether or not a stock is undervalued right now.

How to Read a Balance Sheet
These articles explore the mechanics of a balance sheet and define the items that go into one. Readers will understand how to use this knowledge most effectively to pick stocks.

Introduction to Valuation Methods
How do you value the shares of a publicly traded company? This helpful series details the many and varied ways one can understand the fundamentals about a company's business to value its shares. You can learn to use earnings, revenues, cash flow, equity, dividend yield, and subscribers to figure out how much a company is worth.

Return on Equity
Disarmingly simple to calculate, return on equity (ROE) stands as a crucial weapon in the investor's arsenal if properly understood for what it is. ROE encompasses the three main "levers" by which management pokes and prods the corporation -- profitability, asset management, and financial leverage. This series walks you through how to use ROE to value stocks.

A Look at ROIC (Return on Invested Capital)
It isn't profit margins that determine a company's desirability; it's how much cash can be produced by each dollar of cash that is invested in a company by either its shareholders or lenders. Measuring the real cash-on-cash return is what return on invested capital (ROIC) seeks to accomplish. This series is an introduction to how ROIC is calculated.


Read/Post Comments (13) | Recommend This Article (315)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 08, 2008, at 7:10 PM, eansor wrote:

    This is an extremely interesting and throught provoking series, but not being an accountant, I am finding it somewhat challenging to digest. Examples Examples Examples. Spreadsheets Spreadsheets Spreadsheets.

    It would be wonderful to be able to download a spreadsheet template with references to Yahoo! Finance Income Statement and Balance Sheet.

    I really want to learn this stuff to be a better investor, and I am fascinated by the numbers - I'm a Foolish engineer, what can I say? But so much of this stuff is just Greek to me and cross referencing to existing sources of information would really be helpful.

    Must I use the company's filings to find the information I need or is the paltry information at Yahoo! adequate?

    Finally, Bravo! to the brave Fools who put all this together for us. Thank you Thank you Thank you!

  • Report this Comment On November 02, 2008, at 1:29 AM, irmat wrote:

    As is the engineer about whom I just heard, I too am dizzy with all that just came up with determining value of stock.

    I want to invest well with hopes toward helping a niece and nephew with whatever I can.

    I earned a degree in English many years. Will this help too?

    And Bravo again to the Fools ewho put this together!

    Thank You All

  • Report this Comment On November 02, 2008, at 1:36 AM, irmat wrote:

    Also, how is Charles Schwab with being a broker? I have used this for several years.

    Daren Heatherly

  • Report this Comment On February 15, 2009, at 5:33 PM, krishkarthik wrote:

    Is an interesting article

  • Report this Comment On March 18, 2009, at 9:52 PM, jim60134 wrote:

    As a new, soon-to-be-investor, I am very impressed with all the material on Fool.com. I'm certain that, in time and after further study, I will become a very successful investor. However, I am in absolute agreement with the engineer, eansor, who finds the material on how to value stocks "challenging." I would add "overwhelming" to the description. It would be most helpful if The Motley Fool could create a tutorial using either real life examples or, at the very least, XYZ corp. with balance sheets and P&L's that are every bit as complete and complicated as the real thing. Then, show us specifically all the right numbers to plug into the various valuation methods. An appraisal of these valuations and their meaning would be icing on the cake. Any chance of that happening? Thanks.

  • Report this Comment On May 11, 2009, at 11:53 AM, wolfman225 wrote:

    Hey, Jim. I'm also new to the Fool, but I may be able to help you out. If you pick up an old copy of the "Motley Fool Investment Guide", they illustrate how the different valuations are made (as well as how to interpret the various finalcial statements) using the fictitional company "Messages, Inc."

    The examples are very well laid out for the novice (me) to understand, and don't simply show all positives. They also show warning signs that are not initially apparent and help you learn how to identify these warning signs.

    Hope this helps, Fool on!

  • Report this Comment On September 16, 2009, at 12:42 PM, Investable1876 wrote:

    Valuation means assigning a ''proper'' value, or price, to a stock. The quote marks around ''proper'' remind us that while the word implies that there is a single ''correct'' price, in fact the concept is theoretical. Valuation is nevertheless an important guide to what price at which to buy or sell a stock. If you pay too much for a stock—more than it is ''worth''—your returns will suffer forever after.

    Many large-scale institutional investors—mutual funds, brokerages, hedge funds—have developed complex mathematical models for determining a stock’s ''proper'' price. The individual investor needs to go a different route.

    Fortunately, a second method exists which is just as good, easy to understand, and readily available. This second method uses what are called valuation ratios.

    Valuation ratios divide the stock’s current price (P) by quantifiable aspects of its business: its earnings, its revenue, its book value, and so on. Each ratio is then compared to historical norms to tell whether the stock is fairly priced at its current price P.

    -------------------------

    Money is like muck, not good except it be spread.

    http://www.topinvestingtips.com

  • Report this Comment On December 01, 2009, at 8:25 PM, davesites wrote:

    today i placed a buy for a stock and it took over 10 seconds to go through it never even went to my open orders box and or my execution box. I called scottrades office in st luis and they said that the execution went through at the same time i pushed the buy button but it never should up in my execution box and i was not able to cancels the order because it never showed up in my open orders box. so by time it showed up in my execution box the stock had drop by 2 cents or 10 seconds later.i had to sell it for a 3 cent loss. does this kind of thing happen often? ps 150.00 loss

  • Report this Comment On April 07, 2010, at 10:32 PM, retireewannabee wrote:

    I would have to say I wouldn't have wanted to cancel if I had decided to buy, and I'm not sure why you "had" to sell?

    Don't use Scott, so, don't know about their reliability, but the internet is not completely reliable - a lot of hops from your fingers to the actual trade platform.

    I don't know that any online brokerage could guarantee "seconds matter" efficiency 100% of the time because too much is out of their hands. Your computer, for one thing.

  • Report this Comment On October 13, 2012, at 12:42 PM, mfuechec wrote:

    When you place the order designate the price you're willing to pay to buy it first.

  • Report this Comment On July 10, 2014, at 9:21 PM, DicheBach wrote:

    What about impending change? How do you account for that?

    For example, Forest Oil is just about to undergo an acquisition of Sabine Oil. Forest shares are exceptionally low relative to competitors. Various global events seem poised to diminish supply of petroleum from overseas producers. Apparently the fracking industry has become more and more competitive as smaller players like Forest have come into play.

    How do you account for all of that, the stuff that actually shapes what happens to a firm over the next 6 months to year?

  • Report this Comment On July 11, 2014, at 11:29 AM, hopenbray wrote:

    My husband recently decided to invest some of our money into stocks, and since then I have been trying to understand the stock market and how it works. This article was very interesting to me. Especially the portion on Valuation Methods. It was nice to know exactly what a "share" means, and what it meant when we purchased a "share". Interesting read!

    Hope Bray | http://adeptequity.com

  • Report this Comment On August 28, 2014, at 10:05 PM, rapple wrote:

    There's quite a few people asking for more help to get more info and more clarity. The fool is great at teaching the basics of stock analysis, but you can't expect a simple stock analysis summary to suddenly turn your into a market expert. People spend their lives learning and practising investment and markets spend their time adapting to investors! However. Every time you add to your knowledge you increase the possibility that you can make a better decision. so while some of the above may be overwhelming, etc. your intent should not be to suddenly "get it" (because there's really no such thing, that's what makes markets fun) but rather to incrementally increase your understanding and make better decisions.

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