Five crucial elements that many value investments share

Investing is a big step for anyone. Whether buying real estate, or participating in the stock market, it is undoubtedly a decision of great weight.

In this sense, it is crucial to know when we are talking about a good investment. This goes beyond thinking about those companies that are experiencing significant growth in sales. The issue becomes more important when it comes to investing in the stock market.

Value investing can be defined as a strategy where a person seeks to invest in companies available in the market at a price lower than their intrinsic value.

This last value refers to the total cash flow value that the company will produce during its life or validity, unleashing a reasonable rate.

In other words, value investing is one that seeks to invest with the highest possible safety margin, which is generated when the price gap is wide and the permanent loss of capital is reduced.

In terms of the stock market, this safety margin will be more viable in companies that trade at a lower multiple, that is, comparing price/earnings (P/E), price/sales (P/S), price/value on books (P/BV) and a high return on invested capital (ROIC).

With this in mind, there are some general criteria investors use to find or determine a value investment, of which five are especially self-evident:

Price-earnings ratio

Also known as the P/E ratio, it is a metric used to determine the relative value of a stock. This indicator can be calculated by dividing the current share price by the earnings per share. The lower the ratio obtained, the more undervalued the stock is.

Price-to-book value ratio

This ratio is obtained by dividing a stock's current price by its book value per share, to determine whether the stock is overvalued or undervalued. The book value of a business is determined by subtracting total liabilities from total assets.

This indicator is a conservative estimate of a company's value compared to market value, which is actually determined by how much investors would be willing to pay for a company's stock, based on expected future earnings.

Debt-equity ratio

The metric has to do with the way in which a company is financed. Here you consider where your most capital comes from, whether from debt or equity. An example of this relationship would be a company whose debt is 70 million dollars (mdd) and the social capital is 150 million dollars, then the relationship obtained would be 0.47 cents, which means that for every dollar of capital there are 47 cents of debt. The benefits or disadvantages of this type of relationship depend on each industry.

dividend yields

This indicator shows the amount of dividends that an investor will receive each year from the company in which he invests. It is expressed as a percentage rate. The formula is an annual dividend divided by the current stock price and then multiplied by 100. A high dividend means the investor receives more profit for less money.

Free cash flow

This is the cash a business has on hand after paying its operating expenses and capital expenses.

While all of these metrics help find value stocks, they do not guarantee that the investment will be successful. To get the best deal it is necessary to consider various additional aspects, such as news related to the company or events outside of it. In eToro it is possible to find a large amount of information related to each company listed on the platform, from the ratios mentioned to the opinions of analysts around the world. This in addition to the comments of other users on the network, who freely comment on their estimates or investment theories.

What other factor would you consider to find smart investments?

eToro is a regulated entity, in Europe by the Cyprus Securities and Exchange Commission and in the UK by the FCA. Likewise, it is registered with the CNMV within the section of Investment Services Companies of the European Economic Area in Free Provision. It also has Australian ASIC regulation. CFDs are highly leveraged and risky and may not be suitable for all investors, 67% of individual accounts lose money using CFDs. This content is for informational and disclosure purposes only and should not be considered investment advice or recommendation. Past performance is not an indication of future performance.