Undervalued stocks, what are they?
Undervalued stocks are stocks with great potential that can show significant increases in the short term. It can be worthwhile to look for these types of stocks. You can look for value stocks or growth stocks . But how do you judge whether a stock is undervalued or not? You can use the following indicators :
- Return on Equity (RoE);
- Price-earnings ratio ;
- Earnings per share;
- Intrinsic value per share;
- Dividend yield.
Return on Equity (RoE)
The amount of return the company makes on the invested capital is indicated by the return on equity (RoE). The higher this percentage, the better . The RoE plays an important role in determining the stability of a company. So you want shares with a high RoE in any case . Furthermore, equity = book value = intrinsic value. When a company manages to achieve an annual RoE of more than 15%, this is a very good sign. The company’s management reinvests the previously achieved profits in an intelligent way and knows how to realize profit growth. The higher the return on equity, the better the company’s resources are used.
Price-earnings ratio
Most investors use the price-earnings ratio (P/E) as an important indicator . The P/E ratio indicates how long it takes to get your investment back and how the company is able to deliver good returns. A good P/E is as low as possible and preferably around 10. However, a P/E ratio that is too low can also be a sign that the company in question is not doing well. A P/E that is too high can imply that a stock is overvalued, rather than undervalued. Therefore, look for stocks with a stable P/E ratio of around 10 and in any case less than 15.
Earnings per share
The amount you as an investor can earn per year is represented by the earnings per share . It is an important indicator to judge whether a stock is undervalued. The higher the number, the better . Always take the time to calculate the earnings per share in your search for undervalued stocks. You do this by dividing the net profit by the number of shares issued (excluding preferred shares).
Intrinsic value per share
An interesting indicator to look at when searching for undervalued stocks is the intrinsic value per share. This shows the true value of a stock and the price it should have, based on its book value. It can be positive when the intrinsic value of a stock is higher than its price. However, you don’t see this very often.
Dividend yield
Dividend yield indicates the return on dividends paid out on your shares. It can provide you with a nice extra . It is positive if a company pays out a lot of dividends and you can profit from this. When looking for undervalued shares, you therefore always look at the dividend yield.
Undervalued stock or not
Once you have gone through all the above indicators, you can determine with reasonable certainty whether a stock is undervalued or not. You can then decide whether or not to invest in these stocks.
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