Fundamental Analysis - Ratio values

Dear all
I am a novice at stocks. I am currently trying to grasp fundamental analysis.
I understood that amongst other things such intrinsic value of the company one has to look at ratios such as below.

1. Earnings per Share – EPS
2. Price to Earnings Ratio – P/E
3. Projected Earning Growth – PEG
4. Price to Sales – P/S
5. Price to Book – P/B
6. Dividend Payout Ratio
7. Dividend Yield
8. Book Value
9. Return on Equity

My question is how do I know what are the threshold values of the ratios for one to decide to buy/sell the related share?

for Ex.
Is the PEG ratio = 0.5 is good or PEG =5 is good or PEG = 50 is good for me to decide? Do their threshold values change according to industry, small cap/mid cap etc etc.?

Is there any thumb rule for this or one has to go by last 3 years values of ratios by the company one is researching and the company's particular market leader's ratio values?

I request some help on this from any of you.

Regards and thanks
oneandonlykrishna

Here is a my answer -

Most of the valuation metrics are subjective. There is no clear cut science behind them. Hence no hard and fast threshold as such. Having said that, historically there have been some benchmark values for some of the ratios. And some rules of thumb being formulated around these benchmark values.

The Price multiples - P/E, P/BV and P/S are used to value equity on relative valuation basis. Use them to compare with similar businesses in the same sector. But remember that no 2 companies are identical. P/E is therefore more art than science. They dont give you the intrinsic value. Though I use them to calculate the terminal value in a discounted cash flow valuation model.

P/E and PEG are kind of related. High growth companies attract high P/E. But again like I said the factors are subjective. Investors give high P/E based on corporate governance, transparancy in earnings, simple business models, etc.

Utilities normally get lower P/E. for example, the steel companies used to get P/Es of around 4-6. Though things have changed as the industry structure has changed. I remember Tata Steel never getting more than 7. Today its getting around 15 !. I would sell it if it were 2-3 yrs back.

IT/retail etc on the other hand get higher P/E. Though I belive IT would get lower P/E going forward as they are not expected to do so well in next 2-3 yrs.

A PEG of less than 3 is undervalued. But again remember that its relative to identical co.
P/BV of more than 3 puts a question mark on fair value. Typically this is between 1.5 and 2.5. So looked out for this ratio. Again it depends on the industry. Dont use this ratio to value a small/new/fast growing co. Works best with companairs in matured industries.

P/S or PSR shows how much you are willing to pay per unit of sale the companies make. Again used in relative valuation. It is not useful with companies that dont have stead sales. Dont use it to value companies in cyclical industries.

Divident payout and yield are used to value companies that pay consistent dividents and as a measure in comparison to other debt instruments. Take a look at the companies divident policy to understand and forecast these ratios. Sometimes companies in growth trajectory plough back the divients to reinvest in their capex program and not borrow instead. Use this with companoes that pay dividents consistently, and in proportion to the earnings. I know the Birlas never pay dividents in proportion to their earnings.

ROE depends on the industry and the profitability based on the position of the company in that industry. Use Dupont analysis to slice the ROE for better understanding it. As a thumb rule make sure the ROE is increasing in the least.

EPS is just earnings per share. You cant use it to compare with other cos. for a simple reason that different companies have different numbers of shares outstanding and different securities like options and covertibles at different moneyness. Best use of EPS is to calculate the P/E or on a comparable basis with its historic earnings. It is NOT a valuation ratio.

Hope that helps. And if I missed something, as it is 3:30 am now, let me know by posting on my thread in the Equities section called something like "I can help you .... "

Thanks,

http://www.investmentideas4india.blogspot.com/

thanks, there is so much to learn from this forum

if you want to buy/sell ...then use both fundamental and technical ....

i never look at fundamental ....just one look at chart of candle stick is all what i need along with few indicators.

ultimate goal is to make money ....!so please learn technical analysis along with fundamental analysis

happy trading

suba

This is what I would do -
1. Make a list of fundamentally strong companies using one of the many scanning techniques, viz. top down approach, earnings estimates, even/theme based, CANSLIM, value picks, etc.
2. feed the list in my trading system to generate list of stocks that triggered BUY signals.

Then do the whole process again manually. Do further fundamental and financial analysis, further technical analysis .Basically use margin of safety, take care of false signals, etc.

Dear Mohanlate
Thank you very much for the reply. I have started studying technical analysis as well. I am starting with " teach a man to fish" on this same forum. Honestly I think there is a lot to study , and I dont know when i will really get down to investing with real money.

Thanks and regards
Oneandonlykrishna

Dear Mohan Late

Can you pl. explain the etc.s in your reply ?

For example exactly which approaches you use for the fundamental analysis (canslim, top down etc as u mention this )and which indicators (such as macd etc) or which charting techniques do you value and use in technical analysis?

There seem to be a tad too many techniques to me and I dont know which ones are the most effective for use and there for most necessary to know for a novice

Thank you Suba and Mohanlate once again, for, I am a novice with no one around me in stock trading, so all this help is really really appreciated.

Thanks and have a nice day
oneandonlykrishna

Hi,

How does the BV (book value) is tracked with price, i.e. if a BV of a particular stock is say for example 25 then what should be the stock price?


Is there any confirmed logic behind this theory? Or how does the BV or EPS is associated with the price?


Thanks & Regards,
MiLiND

For TA , take few books which are available in this forum and go through and try to analyse like what is given in those books.

please don't depend on one or two indicators...remember no indicator gives sure signal .....you need to have broader outlook towards whole market ..that is nifty and bse sensex ..and later your stock specific....please do follow cnbc with out fail ...you get to learn alot from there.

many questions will come into mind and on trying to solve them we get to learn . so just keep working with your software

concentrate ...80 percent of Technical analysis.

regards
suba