How to Use Company Valuation

A stock's market value is reflected by its present stock price.

Valuation refers to the process of assessing its underlying company's intrinsic worth.

This involves determining whether the stock is overvalued or undervalued, which can guide our decisions about when to buy and sell.

As Warren Buffet famously put it, "It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price."

The word "price" here means a company's valuation.

The most common way to value a company is to look at its P/E (Price-to-Earnings), P/B (Price-to-Book), and P/S ratios (Price-to-Sales ratios).

But these metrics might not be enough.

The Company Valuation feature on moomoo can provide you with more information.

Open moomoo and tap a stock > Detailed Quotes > Company > Financials, and scroll down to Company Valuation.

You can find the stock's current P/E, P/B, and P/S ratios.

Also, check its historical average of the past three months, six months, a year, and two years.

Model formula:

1. PE (P/E ratio TTM) = stock price / earnings per share (earnings per share = net profit attributable to shareholders of the parent company in the last 12 months / total number of shares)

2. PB (P/B ratio) = stock price / net asset per share (net asset per share = shareholders' equity / total number of shares)

3. PS (P/S ratio) = stock price / revenue per share  (revenue per share = total revenue/ total number of shares)

Recommendation rule:

1. The PE model uses the net profit indicator to calculate the company's valuation, and is more suitable for companies that are stable and profitable.

2. The PS model uses the revenue indicator to calculate the company's valuation, which is more suitable for high-growth companies that are not profitable.

3. The PB model uses the net asset indicator to calculate the company's valuation. It is more suitable for companies with heavy assets and unstable earnings.

4. If none of the above conditions are met, the PS model is displayed by default.

5. The recommendation of valuation model is calculated by the system based on relevant financial indicators. This content is for reference only and does not constitute any investment advice.

Moreover, the feature enables users to see how the stock has performed relative to its peers and the broader market.

Tapping on Comparison, you can add as many as six stocks to compare their valuation metrics.

What can the above information tell us?

1. By comparing current figures to their historical average, we can evaluate whether or not a company may be overvalued or undervalued. If a metric's value is higher than the historical average, the company might be overvalued, while if it's lower, the company could be undervalued

2. Moreover, by comparing a stock's financial indicators to its industry peers, we can gain insight into whether the underlying company has a relatively higher valuation if it's an industry leader or lower valuation if it's behind the cohort.

How does valuation inform our investment decisions?

If the stock you're watching is priced far lower than its valuation, you might consider it a potential buy.

However, if the stock is already relatively expensive or its fundamentals appear to have started to deteriorate, investors might consider this stock overvalued and decide to sell.

Valuation indicators can also help assess risks. When the market enters bear territories, overvalued stocks tend to fall more considerably. In this case, investors might reduce overall position size to manage risks.

It's important to note that the valuation of a stock is subject to multiple factors, including the business model and profitability. Investors need to factor in other aspects before making any investment decision.

Special instructions:

1. When the earnings per share or the net asset per share are negative, the calculated valuation is also negative and belongs to a loss state;

2. The calculation of industry(market) averages and industry(market) rankings has eliminated 「companies and numbers with negative valuations」.