Understanding Revenue Based Stock Valuation

There are many different ways to look at a company to determine if it will be a good investment. While
price per share earnings are one of the most common types of revenue based stock valuation, there are
times when a company may not report positive earnings due to high tax burdens, expansion costs, and
other expenses. Even when this is the case, the company still produces revenue during day to day
operations. Understanding some of the methods used for valuation will help you to identify the best
investments.

In order to assess a real revenue based valuation, one must take a look at the price/sales ratio. This is
calculated using the company's market capitalization, a figure that is equal to the current market price of
stock in the company multiplied by the number of shares outstanding. In other words, if the current share
price of the company's stock is 100 rupees and there are 1 million outstanding shares, the market
capitalization would be 100 times 1 million equals 100 million rupees.

Conservative investors would then add the company's long term indebtedness total to the current market
value of the company to arrive at a more accurate figure for market capitalization. If the company
mentioned above has just taken on a long term debt of 50 million rupees, this figure would be added to the
100 million rupees in share value to get a total market capitalization of 150 million rupees. This approach
makes it possible to avoid getting false comparisons between two different companies when one has a huge
debt and the other is debt free, even if sales are lower.

The next figure needed would be the company's trailing revenue for the past year. This can be arrived at by
looking at quarterly reports and adding the revenue reported for each of the last four quarters together.

Calculating the price/sales ratio is then a simple matter of performing the maths. Let's assume that the
company we are using as an example had revenue of 300 million rupees over the last four quarters. If we
take the current market capitalization of 150 million rupees and divide it by the revenue of 300 million
rupees, we arrive at a P/S ratio of 0.5. As with the P/E ratio, the lower this ratio is, the better the odds
that this will prove to be a good investment.

Making use of the P/S ratio and P/E ratio to evaluate the same corporation can confirm whether it is a
sound investment. A company with a low P/E and a high P/S can mean that one time gains during the last
year have pumped up the earnings per share with no guarantee that such will occur again.

Principles Of Equity Based Stock Valuation

Equity has many different meanings in the business world. Ideally, it is defined as what is left after a
company pays off all of its debts, even if business were to cease immediately. This can be in the form of
merchandise, cash on hand, tangible assets such as office buildings and equipment, and intangibles such as
good will. When it comes to determining whether or not to buy stock in a company, one should consider the
principles of equity based stock valuation.

Most investors want some real value for their dollars spent investing in a company. This is best achieved by
choosing stocks from companies that have a high equity value as opposed to companies with heavy debt
loads. One of the best ways to ensure this is by choosing companies that have more cash on hand than the
current market value of their stocks.

A gentleman by the name of Ben Graham created a system for choosing such companies. He first took into
account the amount of cash, cash equivalents, and investments that could be liquidated fairly easily. He
would then divide this figure by the number of outstanding shares. This told him exactly how much of the
current price per share was represented by the cash the company had on hand. He found that buying stock
in a company with large amounts of cash held many benefits.

Another way to measure the value of a company is by looking at the company's working capital. Working
capital can be defined as the difference between a company's assets and its liabilities. This represents what
the company has available to use in the course of day to day operations. High working capital can be used
to fund expansions and research, just as having a great deal of cash on hand.

One can also look at shareholder equity. This figure represents what would be left to divide among the
shares of stock if the company were completely liquidated right now. This means that if all assets were sold
right now and all the company's debts were paid, the money that is left to split among the stockholders
divided by the number of shares is the shareholder equity.

Equity based stock valuation is one of the better methods of determining if an investment is good or bad.
One would much rather invest in a company with a great deal of equity than in a company with a high debt
load and a great deal of risk.

Stock Valuation based on cash Flow

There are many different ways to look at a company and determine how successful it is and how much
the stock would be worth. One of the best ways to evaluate a company is by looking at its cash flow. This
means looking at how much the company is spending vs. How much it is taking in as revenue to determine
whether the company is making money or losing it.

There are, however, some factors to consider and some to discount when looking at cash flow in order to
obtain a good idea of how the company is doing. Most financial advisors define cash flow as a company's
earnings before taxes, interest, amortisation, and depreciation. There are some very good reasons for
discounting these items when looking at cash flow.

One should look at the company's day to day operations without regard to interest income or taxes. Taxes
vary from year to year based on changes in laws as much as changes in income. Interest income will vary
based on the amount of money the company is able to keep in the bank at any given time. These variables
actually have little to do with the daily operations of the business and how much it earns compared to
spending.

Amortisation and depreciation are non cash expenditures that show up on a company's balance sheet as a
means of tracking the value of equipment and supplies. They serve a purpose when it comes to calculating
taxes for the company, but have little or nothing to do with operating the business on a day to day basis.

Smart investors will look at cash flow when deciding whether or not to invest in a company that must lay
out a great deal of cash on the front end. A good example would be a cable company. This company must
lay out a great deal of cash on the front end to create their network. However, amortisation of the
equipment and network takes this expense out of the equation when looking at the company's cash flow
and income. In most cases, such corporations have a growing cash flow from the beginning.

Cash flow is one of the better methods of stock valuation. This is because it looks at the actual day to day
operations of the business rather than expenditures for equipment or taxes. It also discounts secondary
sources of income such as interest