Stock Market Investing Fast Track: the Beginner's Guide to Making Money in Stocks by Ken Little

Author:Ken Little
Language: eng
Format: epub
ISBN: 9780744061819
Publisher: DK Publishing

The Next Step: Analyzing the Business

Analyzing a company may seem like a daunting task, and it can be. The key is to focus on the important concerns such as revenues, earnings, and cash flows. Then you will see a clear picture of the company’s financial health.

If you are satisfied that the company has a large and sustainable economic advantage, it’s time to move on to analyzing the business and coming up with a fair market value (intrinsic value). Two things to keep in mind: the intrinsic value is what the stock price should be if it reflected the true value of the company, and it is also a moving target that will change as the company’s financial fortunes change. Finding that number (stock price) will tell you whether the stock is a bargain, priced about right, or overpriced.

Value investors are looking for stocks that the market is pricing significantly below the intrinsic value. Growth investors may be happy with a stock price that is close to the intrinsic value, but the company still has much room for growth. If you are looking for a core stock that you hope will provide a higher stock price in the future and/or a steady stream of dividend income, the intrinsic value tells you if the stock is fairly priced.

Before I dive into valuation, let’s look at some of the more popular stock ratios.

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