Analyzing Stocks Like a Master in 2022 and Beyond

Analyzing Stocks Like a Master

Do you want to make money in the stock market? If you’re getting into investing, you’ll eventually want to get into analyzing stocks. This can be a complex process, but it is worth it if you want to find the best stocks to buy and make a profit. In this blog post, we will provide tips for analyzing stocks using fundamental values and technical analysis. Let’s get started!

P/E Ratio

The price-to-earnings ratio (P/E ratio) is a key metric for analyzing stocks. It is a simple way to compare a company’s stock price to its earnings per share (EPS). To calculate the P/E ratio, divide the stock price by EPS.

For example, let’s say Company XYZ has a stock price of $100 and EPS of $20. This gives Company XYZ a P/E ratio of 100/20, or five.

What does this number mean? It means that investors are willing to pay $100 for every $20 in earnings that the company generates. In other words, they expect the company’s earnings to grow by five times in the future.

Now, let’s take a look at how to use the P/E ratio to analyze stocks.

When analyzing stocks, you want to compare the P/E ratios of companies in the same sector. This will give you an idea of whether a stock is undervalued or overvalued relative to its peers.

For example, let’s say the average P/E ratio for companies in the healthcare sector is 20. Company XYZ has a P/E ratio of five, which means it is undervalued relative to its peers. This could be a good buy opportunity.

On the other hand, let’s say the average P/E ratio for companies in the tech sector is 50. Company XYZ has a P/E ratio of 100, which means it is overvalued relative to its peers. This could be a sell opportunity.

EBITDA

EBITDA is another key metric for analyzing stocks. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. In other words, it is a measure of a company’s profitability.

There are two ways to calculate EBITDA:

  • Add up a company’s net income, interest expense, tax expense, depreciation expense, and amortization expense
  • Subtract a company’s operating expenses from its revenues

For example, let’s say Company XYZ has net income of $50, interest expense of $30, tax expense of $20, depreciation expense of $40, and amortization expense of $30. This gives Company XYZ an EBITDA of $50 + $30 + $20 – $40 – $30, or $80.

Now, let’s take a look at how to use EBITDA to analyze stocks.

When analyzing stocks, you want to compare the EBITDA of companies in the same sector. This will give you an idea of a company’s profitability relative to its peers.

For example, let’s say the average EBITDA for companies in the healthcare sector is $100. Company XYZ has an EBITDA of $80, which means it is less profitable than its peers. This could be a red flag.

On the other hand, let’s say the average EBITDA for companies in the tech sector is $50. Company XYZ has an EBITDA of $80, which means it is more profitable than its peers. This could be a good sign.

Internal Rate of Return (IRR)

The internal rate of return (IRR) is a key metric for analyzing stocks. IRR is the percentage rate of return that a company must earn on its projects to break even. In other words, it is the minimum rate of return that a company needs to earn on its investments.

There are two ways to calculate IRR:

  • Use the IRR formula: IRR = -N + C(0) / C
  • Use a financial calculator or spreadsheet software

For example, let’s say Company XYZ has a project with an initial investment of $100 and cash flows of $50, $60, and $70 over the next three years. This gives Company XYZ an IRR of 20%.

Now, let’s take a look at how to use IRR to analyze stocks.

When analyzing stocks, you want to compare the IRRs of companies in the same sector. This will give you an idea of a company’s minimum rate of return relative to its peers.

For example, let’s say the average IRR for companies in the healthcare sector is 15%. Company XYZ has an IRR of 20%, which means it needs to earn a higher rate of return on its projects to break even. This could be a red flag.

On the other hand, let’s say the average IRR for companies in the tech sector is 25%. Company XYZ has an IRR of 20%, which means it needs to earn a lower rate of return on its projects to break even. This could be a good sign.

Terminal Value

The terminal value is the present value of all future cash flows from a project. In other words, it is the projected cash flow at the end of a project’s life.

There are two ways to calculate terminal value when analyzing stocks:

  • Use the terminal value formula: TV = CFn / (r – g)
  • Use a financial calculator or spreadsheet software

For example, let’s say Company XYZ has a project with projected cash flows of $100, $200, and $300 over the next three years. The terminal value of this project is $900.

Now, let’s take a look at how to use terminal value to analyze stocks.

When analyzing stocks, you want to compare the terminal values of companies in the same sector. This will give you an idea of a company’s future cash flow relative to its peers.

For example, let’s say the average terminal value for companies in the healthcare sector is $1000. Company XYZ has a terminal value of $900, which means it has less future cash flow than its peers. This could be a red flag.

On the other hand, let’s say the average terminal value for companies in the tech sector is $500. Company XYZ has a terminal value of $900, which means it has more future cash flow than its peers. This could be a good sign.

Book Value per Share

The book value per share is the book value of a company divided by the number of shares outstanding.

To calculate book value per share when analyzing stocks, you need to know two things:

  • The book value of a company
  • The number of shares outstanding

The book value of a company is the sum of all its assets minus all its liabilities.

The number of shares outstanding is the number of shares that a company has issued minus the number of shares that have been repurchased.

For example, let’s say Company XYZ has assets of $1000 and liabilities of $500. The book value of Company XYZ is $500. If Company XYZ has 100 shares outstanding, then the book value per share is $500 / 100 = $5000.

Price to Free Cash Flow

The price to free cash flow is the price of a stock divided by the free cash flow per share.

To calculate price to free cash flow when analyzing stocks, you need to know two things:

  • The price of a stock
  • The free cash flow per share

Free cash flow per share is calculated by taking the total free cash flow and dividing it by the number of shares outstanding.

For example, let’s say Company XYZ has a price of $100 and free cash flow per share of $20. The price to free cash flow is $100 / $20 = $5000.

Now, let’s take a look at how to use price to free cash flow to analyze stocks.

When analyzing stocks, you want to compare the price to free cash flow ratios of companies in the same sector. This will give you an idea of a company’s value relative to its peers.

For example, let’s say the average price to free cash flow ratio for companies in the healthcare sector is 20. Company XYZ has a price to free cash flow ratio of 50, which means it is overvalued relative to its peers. This could be a red flag.

On the other hand, let’s say the average price to free cash flow ratio for companies in the tech sector is 50. Company XYZ has a price to free cash flow ratio of 20, which means it is undervalued relative to its peers. This could be a good sign.

Price to Earnings Growth (PEG)

The price to earnings growth (PEG) ratio is the price to earnings ratio divided by the earnings per share growth rate.

To calculate the PEG ratio when analyzing stocks, you need to know three things:

  • The price to earnings ratio
  • The earnings per share growth rate
  • The number of shares outstanding

The price to earnings ratio is the price of a stock divided by the earnings per share.

The earnings per share growth rate is the percentage change in earnings per share over time.

For example, let’s say Company XYZ has a price to earnings ratio of 20 and an earnings per share growth rate of 30%. The PEG ratio is 20 / 30% = 0.67.

Now, let’s take a look at how to use the PEG ratio to analyze stocks.

When analyzing stocks, you want to compare the PEG ratios of companies in the same sector. This will give you an idea of a company’s value relative to its earnings growth.

For example, let’s say the average PEG ratio for companies in the healthcare sector is 0.67. Company XYZ has a PEG ratio of 0.50, which means it is undervalued relative to its peers. This could be a good sign.

On the other hand, let’s say the average PEG ratio for companies in the tech sector is 0.50. Company XYZ has a PEG ratio of 0.67, which means it is overvalued relative to its peers. This could be a red flag.

Simple Moving Average (SMA)

The simple moving average (SMA) is the average price of a stock over a certain period of time.

To calculate the simple moving average when analyzing stocks, you need to know two things:

  • The prices of a stock over a certain period of time
  • The number of days in that period of time

For example, let’s say Company XYZ has a stock price of $100 on Monday, $110 on Tuesday, and $120 on Wednesday. The simple moving average would be (100 + 110 + 120) / 3 = $110.

Exponential Moving Average (EMA)

The exponential moving average (EMA) is a weighted average of a stock’s price over time.

To calculate the exponential moving average when analyzing stocks, you need to know two things:

  • The prices of a stock over a certain period of time
  • The number of days in that period of time

The exponential moving average is calculated using a weighting factor. This weighting factor is used to give more recent prices more weight than older prices.

The actual formula looks like this:

EMA (Last time period) = Value(Now) x Smoothing Factor + (1 – Smoothing factor) x EMA (Previous period)

EMA (First Time Period) = Value (First time period)

Smoothing Factor = 2 / (Number of time periods + 1)

For example, let’s say Company XYZ has a stock price of $100 on Monday, $110 on Tuesday, and $120 on Wednesday. The exponential moving average would be (100 * 0.95) + (110 * 0.90) + (120 * 0.85) = $113.50.

To make it much simpler, use a calculator. Alternatively, check this out for help calculating EMA in Excel.

As you can see, the exponential moving average is a more sensitive measure of a stock’s price than the simple moving average. When analyzing stocks, it is often a more accurate depiction of recent price changes compared to longer-term swings.

MACD

The MACD is a momentum indicator that shows the relationship between two moving averages when analyzing stocks.

To calculate the MACD, you need to know three things:

  • The 12-day exponential moving average
  • The 26-day exponential moving average
  • The nine-day exponential moving average of the MACD

The MACD is calculated by subtracting the 26-day exponential moving average from the 12-day exponential moving average. The nine-day exponential moving average of the MACD is then plotted on top of the MACD line.

This creates a histogram that shows how far the MACD line is from the nine-day exponential moving average of the MACD line. The MACD line is used to signal changes in momentum.

A MACD line that is above the nine-day exponential moving average of the MACD line is considered bullish. A MACD line that is below the nine-day exponential moving average of the MACD line is considered bearish.

The MACD histogram is used to signal the strength of the MACD line. A MACD histogram that is above the zero line is considered bullish. A MACD histogram that is below the zero line is considered bearish.

MACD divergence occurs when the MACD line diverges from the price of the security. There are two types of MACD divergence:

  • Positive MACD divergence occurs when the MACD line diverges from the price of the security in a bullish direction
  • Negative MACD divergence occurs when the MACD line diverges from the price of the security in a bearish direction

Positive MACD divergence is considered a bullish signal, while negative MACD divergence is considered a bearish signal.

MACD convergence occurs when the MACD line converges with the price of the security. MACD convergence is considered a bullish signal.

As you can see, the MACD is a powerful tool that can be used to analyze stocks. By understanding how to calculate the MACD and how to use it to analyze stocks, you can make better investment decisions.

Relative Strength Indicator (RSI)

The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price when analyzing stocks.

The RSI is calculated using a formula that includes the average gain and the average loss over a specified time period. The RSI can be used with any time frame, but 14 days is the most common.

The RSI is a versatile indicator that can be used to identify trends, identify overbought or oversold conditions, and spot potential reversals.

The RSI is calculated using the following formula:

RSI = 100 – (100 / (Average Gain / Average Loss))

If the stock price is increasing, the RSI will be above 50. If the stock price is decreasing, the RSI will be below 50.

An RSI above 70 is considered overbought, and an RSI below 30 is considered oversold. The RSI can also be used to identify divergences.

A bullish divergence occurs when the stock price is making new lows and the RSI is making new highs. A bearish divergence occurs when the stock price is making new highs and the RSI is making new lows.

Bollinger Bands

Bollinger bands are a technical indicator that is used to measure price volatility when analyzing stocks. Bollinger bands are created by adding and subtracting a standard deviation from a simple moving average.

The upper Bollinger band is created by adding the standard deviation to the simple moving average. The lower Bollinger band is created by subtracting the standard deviation from the simple moving average.

Bollinger bands are often used to identify overbought or oversold conditions in the market. If the stock price is trading above the upper Bollinger band, it is considered overbought. If the stock price is trading below the lower Bollinger band, it is considered oversold.

Bollinger bands can also be used to identify divergences. A bullish divergence occurs when the stock price is making new lows and the Bollinger bands are making new highs. A bearish divergence occurs when the stock price is making new highs and the Bollinger bands are making new lows.

Quick Ratio

The quick ratio is a liquidity ratio that measures the ability of a company to pay its short-term obligations. The quick ratio is calculated by dividing the sum of cash, marketable securities, and accounts receivable by the amount of short-term liabilities.

When analyzing stocks, the quick ratio is a useful measure of liquidity because it excludes inventory from the calculation. Inventory is considered to be the least liquid of all the assets because it can take longer to convert inventory into cash.

The quick ratio is often used to assess the financial health of a company. A quick ratio of less than one indicates that the company does not have enough liquid assets to cover its short-term obligations.

A quick ratio of greater than one indicates that the company has enough liquid assets to cover its short-term obligations.

The quick ratio is a valuable tool for assessing the financial health of a company, but it should be used in conjunction with other ratios, such as the current ratio and the debt-to-equity ratio.

Return on Equity

Return on equity (ROE) is a profitability ratio that measures the return that shareholders earn on their investment in the company. ROE is calculated by dividing net income by shareholder equity.

Shareholder equity is the portion of the company’s assets that are owned by shareholders. It includes both common stock and preferred stock.

When analyzing stocks, ROE is a valuable metric for assessing the profitability of a company. That said, it should be used in conjunction with other ratios, such as return on assets (ROA) and return on capital (ROC).

Return on Assets

Return on assets (ROA) is a profitability ratio that measures the return that shareholders earn on their investment in the company. ROA is calculated by dividing net income by total assets.

Total assets is the sum of all the company’s assets, including cash, investments, property, equipment, and inventory.

ROA is a valuable metric for assessing the profitability of a company, but it should be used in conjunction with other ratios, such as return on equity (ROE) and return on capital (ROC).

Earnings Per Share (EPS)

Earnings per share (EPS) is a profitability ratio that measures the earnings that shareholders earn on their investment in the company. EPS is calculated by dividing net income by the number of shares outstanding.

The number of shares outstanding is the number of shares that are owned by shareholders. EPS is a valuable metric for assessing the profitability of a company when analyzing stocks, but it should be used in conjunction with other ratios.

Revenue Growth

Revenue growth is a measure of the increase in revenue that a company experiences over a period of time. Revenue growth can be measured on a quarterly or annual basis.

To calculate revenue growth, simply divide the current revenue by the revenue from the same period in the previous year. For example, if Company A had revenue of $100 million in the first quarter of 2017 and revenue of $120 million in the first quarter of 2018, their revenue growth would be 20%.

Revenue growth is a valuable metric for assessing the health of a company. It can be used to measure the success of a company’s new products or services, or to assess the overall growth of the company.

Revenue growth is also a useful tool for comparing companies in the same industry. For example, if Company A has a revenue growth of 20% and Company B has a revenue growth of 30%, then Company B is growing at a faster rate.

When analyzing stocks, revenue growth can also be used to assess the relative health of different sectors of the market. For example, if the revenue growth of the tech sector is outpacing the revenue growth of the overall market, then it’s a good time to be investing in tech stocks.

Dividend Growth Rate

The dividend growth rate is the percentage increase in dividend payments that a company experiences over a period of time. The dividend growth rate can be measured on a quarterly or annual basis.

To calculate the dividend growth rate when analyzing stocks, simply divide the current dividend by the dividend from the same period in the previous year. For example, if Company A paid a dividend of $0.50 per share in the first quarter of 2017 and a dividend of $0.60 per share in the first quarter of 2018, their dividend growth rate would be 20%.

The dividend growth rate is a valuable metric for assessing the health of a company. It can be used to measure the success of a company’s new products or services, or to assess the overall growth of the company.

Net Profit Margin

The net profit margin is a profitability ratio that measures the percentage of net income that a company retains after all expenses are paid. The net profit margin is calculated by dividing net income by total revenue.

For example, if a company has net income of $100 million and total revenue of $200 million, their net profit margin would be 50%.

In Sum

There are a lot of different ways to start analyzing stocks, but these are some of the most important metrics that you should keep an eye on. By analyzing these factors, you’ll be able to get a better sense of whether or not a stock is a good investment.

Remember, however, that no single metric should be used in isolation. Be sure to look at a variety of factors before making any investment decisions.

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