So how do you value a company?
Here are two simple ways to start thinking about how to value a company:
Some investors value companies by its P/E ratio, which is simply a company’s current price divided by its annual earnings. The more confident investors are about the company’s future performance, the more they are willing to pay for the stocks of the company, resulting in the company having a higher P/E ratio.
Since the P/E ratio is a reflection of investors’ views, it will vary from company to company. Companies with stronger growth or ones that operate within very stable industries are usually able to command a higher P/E ratio since investors will tend to have greater confidence in their future prospects.
However, in some cases, investors might value their investment by the dividend yield that they are able to get from the stock. The dividend yield is calculated by taking the annual dividends per share divided by the stock price. Simply put, the higher the dividend yield, the more attractive the stock is to investors.