Valuation of Stock - SS1 Accounting Lesson Note
Valuation of stock refers to the process of determining the worth or value of a company's shares of stock. This is important for investors who want to determine whether a company's stock is overvalued, undervalued, or fairly priced.
If a stock is undervalued, it may be a good investment opportunity, while an overvalued stock may be a risky investment. Therefore, the valuation of stock is an important process for investors and helps to determine the fair value of a company's shares of stock.
Methods of valuation of stock
There are several methods used to value stocks, and they include:
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Price-to-Earnings (P/E) Ratio: The price-to-earnings (P/E) ratio is a valuation metric that compares a company's stock price to its earnings per share (EPS) over a certain period of time.
Dividend Discount Model (DDM): The dividend discount model (DDM) is a method used to value the stock of a company based on the theory that its stock price is equal to the present value of its future dividend payments.
Discounted Cash Flow (DCF) Analysis: The discounted cash flow (DCF) analysis is a valuation method that estimates the value of an investment based on its future cash flows. It involves estimating the future cash flows of the investment, discounting them back to their present value, and summing them to arrive at the total present value.
Price-to-Sales (P/S) Ratio: The price-to-sales (P/S) ratio is a valuation metric that compares a company's stock price to its sales per share.