Feb 19 2025 38 mins 36
In this episode of the Investing for Beginners podcast, the hosts delve into four primary methods to value a stock: Price to Earnings (P/E) ratio, Price to Sales (P/S) ratio, Price to Free Cash Flow (P/FCF) ratio, and Return on Equity (ROE).
They begin with an in-depth discussion of the PE ratio, explaining its calculation, significance, and limitations while also providing examples from various industries. They then move on to the PS ratio, highlighting its utility for early-stage growth companies and its limitations. For Price to Free Cash Flow, they detail the calculation process and explain why this metric might be more volatile but useful for valuing a company's cash-generating efficiency. Finally, they explore ROE, emphasizing its importance in assessing a company's profitability relative to shareholder equity and the potential pitfalls associated with debt manipulation.
This episode is packed with valuable insights and practical examples to help beginners better understand stock valuation metrics.
Link to 4 Ways to Value a Stock Infographic
https://www.canva.com/design/DAF9oFDWqqs/InAZ8cTXtihE5PNqD-8DwQ/view?utm_content=DAF9oFDWqqs&utm_campaign=designshare&utm_medium=link2&utm_source=uniquelinks&utlId=hb507626659
00:00 Introduction to Stock Valuation
00:22 Understanding the PE Ratio
03:18 Industry-Specific PE Ratios
05:36 Limitations of the PE Ratio
10:24 Introduction to the PS Ratio
11:13 Using the PS Ratio for Growth Companies
13:47 Introduction to Price to Free Cash Flow
16:10 Calculating Free Cash Flow
23:54 Introduction to Return on Equity
24:44 Buffett's Approach to ROE
29:34 Potential Pitfalls of ROE
30:43 Conclusion and Q&A
Today's show is sponsored by:
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Go to get.stash.com/INVESTING to see how you can receive $25 towards your first stock purchase and to view important disclosures.
This episode is sponsored by BetterHelp. Give online therapy a try at betterhelp.com/INVESTING and get on your way to being your best self.
What do Dave and Andrew recommend? Our free ebook and email series, at stockmarketpdf.com.
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