Analysis of the criteria to decide the purchase of a share

Six criteria for deciding to buy a share

1. Price / nominal value

If the price is lower than the nominal value (ratio less than 1), this would mean that the book value of the share is higher than the value that must be paid to acquire it. It would be an argument for the purchase.

So: If the ratio is small, the argument for buying is great.

2. PER (Price Earning Ratio)

PER = Market capitalization / profit

or:

PER = price of a share/ benefit of ashare

Interpretation:

The higher the PER, the more expensive the share.

The lower the Per, the less the share is expensive.

So: a low PER is a buying argument.

To evaluate the PER, it is compared to its historical average or relative to the average PER of the sector.

3. PER / growth

PER / Projected profit growth

A company that has a PER ratio of 40 and projects a profit increase of 20% for the next year would have a PPER/growth ratio of 2 (40 divided by 20).

A company that has a PER ratio of 40, but projects a 40% increase in profits, would have a PER/growth ratio of 1 (40 divided by 40).

The higher the expected profit growth, the lower the value of the ratio and the less the stock buyer has to pay to benefit from earnings growth.

So: the lower the ratio, the more interest it has to buy it.

4. Market Capitalization / Turnover

(Market capitalization / turnover) x 100

If a company has a significantly higher turnover than its market capitalization, it is likely to be undervalued.

So: the higher the ratio, the more the buyer has an interest in buying it.

5. Expected return – Return relative to the Stock Market Value

If the value (expected return – return relative to the market value) is positive, the user will buy.

6. Expected Return – Return Versus Nominal Value

If the value (expected return – return relative to face value) is positive, the user will buy.

LinkNotions