Stock Valuation: Understanding the Purpose and Methods

Many investors use fundamental analysis to determine whether or not a particular investment is suitable. Fundamental analysis is used to determine a stock or company's valuation, which is gathered by a series of data points.

Valuation

Valuation is the process used to determine the value of a stock or company. Various techniques are used—some are objective, while others are subjective.

Valuation Analysis

Valuation analysis is a key component of fundamental analysis. Investors look to compare one stock with another (or multiple stocks) to judge the value of the asset.

Function

Stock valuation is determined by evaluating various key data points like feature earnings, value of company assets, even management.

Metrics

Metrics, or ratios, are used to determine valuation. Metrics are calculated data that is used for comparison. The most used metrics are price to earnings (P/E), price/book and discounted cash flow.

Considerations

Stock valuation is an easy concept to understand. However, observation of valuation multiples may be set you up for a trap. Do extra homework to be able to spot the difference between companies.