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There are numerous posts about learning stock trading basics. But I have a specific question:
In your opinion, what is the best book / internet resource to learn how to calculate the share price of a stock from a company's balance sheet?
You don't have to do this. The "book value" is a way of looking at the firms reported assets and liabilities. The premium that well run firms in growth oriented industries command is set by the market, as is the penalty for under valued stocks.
Intrinsic Value, Discounted Cash Flow and Margin of Safety - this is a must for calculating fair value for any company. There is also a Fair Value calculator that you can use to get a quick idea of a companies fair value, just be sure to plug in accurate info.
There are numerous posts about learning stock trading basics. But I have a specific question:
In your opinion, what is the best book / internet resource to learn how to calculate the share price of a stock from a company's balance sheet?
You don't need a book to learn how to calculate the value of a stock.
You just need to know:
1. EPS
2. P/E Ratio
3. Debt Ratio
4. PEG Ratio
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1. EPS of a company can be found on any website. To calculate it manually; divide total earnings by the number of outstanding shares. It's better to have a high EPS. It's a measure of potential growth.
2. P/E Ratio of a company can be found on any website. To calculate it manually; divide the current price per share by the earnings per share (EPS). If the P/E ratio is low, it might mean the company is undervalued or investors view it as a poor invesment. If the P/E ratio is high, it might mean the company is overvalued and may disappoint investors by not growing as fast as it is expected.
3. Debt Ratio of a company can be calculated by dividing total debt by total assets. It's better to have a low debt ratio. The higher the debt ratio, the more leveraged it is, which makes it more risky.
4. PEG Ratio of a company can be calculated by dividing the P/E Ratio by the earning growth rate (you can find the earnings growth rate on investment websites such as MSN MoneyCentral). A PEG Ratio around 1 means the company is fairly valued (higher = more expensive).
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This method is best used when comparing companies in the same industry. For example, GOOG vs. YHOO - F vs. TM - AAPL vs. MSFT etc.
Yeah, I took a couple of finance courses, and basically the current price of a share is supposed to be the future dividend stream discounted to the present value using an appropriate discount rate. This makes sense to me fundamentally, because when you buy into the partial ownership of a company, you are going to realise a return ONLY from dividends if you continue to hold that share.
The devil is in the details, of course, especially in determining the appropriate discount rate, and then having to fend off arguments from people who think that stock market investing is only about share price appreciation.
That's the problem between theory vs. reality or school vs. real-world
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