It is entirely possible for individual investors to beat the stock market. With dedicated practice it can be done.
Market averages can be consistently beaten.
If you're new to investing, and not sure how to value a company then read on! Here are five excellent valuation lessons that – if mastered – will improve your investing returns.
1. Learn to calculate cash and debt on a balance sheet. Good investments can have debt, but the more debt a company has, the riskier the investment.
2. If you decide a company is a very good one, but they have a lot of debt, then you must learn to analyse the cash flow statement. Can the company support their debt? Comfortably?
3. P/E ratio – or PER. It is good to track P/E over time – the same goes for all price multiples . Where cash flow can give us an immediate value within a range, the P/E ratio measures emotion. The two together make very reliable tools to gauge value.
4. You're valuing a business, so imagine owning it. What are the risks? Opportunities? Returns? Match the numbers to the story – your investment thesis.
5. Find growth estimates for the company. Pay particular attention to companies with rising earnings estimates. Likewise, beware companies with falling earnings estimates.