1. Common valuation methods To be honest, valuation is not difficult.

There are only a few common valuation methods: more simply, calculate the price-to-earnings ratio (PE), price-to-book ratio (PB), and price-to-sales ratio (PS).

PE = Market value / Net profit = Stock price / Earnings per share The price-to-earnings ratio means the length of time it takes to recover capital. If you spend 10 billion to buy this company that earns 1 billion a year, it will take 10 years to recover the investment cost of 10 billion.

PB = market value / net assets = stock price / net assets per share. The meaning of PB is how much an enterprise's assets with a book value of 1 yuan are valued in the capital market.

For example, PB is 0.8, which means that you can buy an asset with a book value of 1 yuan for 0.8 yuan.

PS = market capitalization/revenue = stock price/revenue per share. The price-to-sales ratio is usually used to evaluate some asset-light high-quality companies with high growth, no profit, or very little profit.

The data used in these valuation methods are all ready-made numbers, and the results can be known by simply doing calculations.

On a more advanced level, calculate PEG.

PEG = PE/net profit growth rate. PEG takes into account both the current valuation of the company and its future performance growth rate. It is usually used for the valuation of growth stocks.

More advanced, use the discounted cash flow method to estimate the intrinsic value of a company.

The discounted cash flow method actually applies the bond valuation model to stock valuation.

For example: When the market risk-free interest rate is 3%, how much is a one-year bond with a face value of 100 yuan and a 5% coupon rate worth?

The answer is 101.94 yuan.

The calculation method is also very simple. After one year of maturity, this bond can receive a principal of 100 yuan and an interest of 5 yuan, which is 105 yuan per year.

Another person did not buy this kind of bond and can only earn 3% risk-free return. If he wants to have 105 yuan in one year, he must invest 101.94 yuan of principal now (101.94*(1+3%)=105

Yuan).

This is the simplest bond valuation model.

By replacing the bond interest in this model with stock dividends or corporate free cash flow, the intrinsic value of the stock can be estimated.

2. The nature of valuation. To know what it is, you also need to know why it is so.

Before explaining these valuation methods in depth, Uncle Wang first talks about the essence of valuation.

There is a saying in economics: Price fluctuates around value.

Since there are fluctuations, there are times of overestimation and underestimation.

If the price is higher than the value, it is overvalued.

If the price is lower than the value, it is undervalued.

If you buy when it is overvalued, you may bear the risk of downward price fluctuations.

This is what is commonly referred to as “too expensive to buy.”

The truth is so simple, everyone understands it.

But in practice, especially in the stock and fund markets, many people only see the price and not the value.

Why can't I see it?

I don’t know how to judge the true value of the market.

How to determine the true value of the market?

Use valuation.

Valuation is a research method.

Use "valuation" tools to determine whether the market price is higher or lower than the intrinsic value.

Buy when the market price is lower than the intrinsic value.

Sell ??when the market price is higher than the intrinsic value.

Of course, valuation is just a method, which was born to study the intrinsic value of investment targets. In practical application, valuation must not be done for the sake of valuation.

This must be kept in mind.

In addition, nothing in this world is perfect, and valuation methods also have limitations and cannot be applied to all scenarios.

Fortunately, countless predecessors have racked their brains to design new valuation methods, and over time, there are many valuation methods.

Next, Uncle Wang will take you to take stock of the mainstream valuation methods in the market and their limitations.

3. Detailed explanation of common valuation methods 1. Price-to-earnings ratio (PE) The concept of price-to-earnings ratio can be traced back to Buffett’s teacher Graham.

In his book "Securities Analysis" published in 1934, he wrote: The value of a common stock is a certain multiple of its current earnings. This multiple is partly determined by the popularity at the time, and partly determined by the nature and record of the company.

This certain multiple is what we call the price-to-earnings ratio (PE).

PE = Market value / Net profit = Stock price / Earnings per share To understand simply, the price-to-earnings ratio (PE) is the company's market value divided by the company's net profit.

For example, if a company earns 1 billion a year and has a market value of 10 billion, its price-to-earnings ratio (PE) is 10 times.

The price-to-earnings ratio means the length of time it takes to recover capital. If you spend 10 billion to buy this company that earns 1 billion a year, it will take 10 years to recover the investment cost of 10 billion.

Generally speaking, the lower the P/E ratio, the shorter the payback time and the more beneficial it is to investors.

According to the different selection time of net profit, the P/E ratio is divided into static P/E ratio, dynamic P/E ratio and TTM P/E ratio.