A quick way to value a company

By | January 6, 2015

Here are a couple ways to value a company to see if it is a good investment or not~

Book value, by subtracting all it owns with all that it owes, you will come up with its worth on paper. For investors like Warren Buffett, they look to buy stocks on sale, so that means buying companies at a discount. That way you have a margin of safety, even if the stocks goes down momentarily. You will still know that you bought it at a discount, and there is room for it to grow.

Here are two measures that check to see if a company has too much debt:

Look at the Long Term Liabilities. When compared to its assets year over year, are the liabilities growing faster than assets?

Interest Coverage Ratio

Find out its Debt-to-Equity ratio (total debt/shareholder equity). This measures its solvency (higher than 1 means company is funded more by debt than equity). If everything looks good then look at its Income statement to see its earnings:

 

If a company is good at making huge returns, it is best if they use their earnings to reinvest it in the business. Many companies with quality management and great economic moats will also produce so much cash flow that it can return this cash to stockholders in the form of dividends and continually increase them. It is rare for a company to continually give a dividend and increase them year over year, but there are some companies that do just that. Here are stocks that have given a dividend and consistently increased them:

 

Company Symbol Dividend Yield
3M Co MMM 2%
Abbott Laboratories ABT 2.30%
AbbVie Inc. ABBV 3.30%
AFLAC Inc AFL 2.30%
Air Products & Chemicals Inc APD 2.60%
Archer-Daniels-Midland Co ADM 1.80%
AT&T Inc T 5.10%
Automatic Data Processing ADP 2.50%
Becton Dickinson & Co BDX 1.80%
Bemis Co Inc BMS 2.70%
Brown-Forman Corp B BF.B 1.60%
Cardinal Health Inc CAH 1.90%
Chevron Corp CVX 3.30%
Chubb Corp CB 1.90%
Cincinnati Financial Corp CINF 3.30%
Cintas Corp CTAS 1.40%
Clorox Co CLX 3.20%
Coca-Cola Co KO 2.80%
Colgate-Palmolive Co CL 2.10%
Consolidated Edison Inc ED 4.30%
Dover Corp DOV 1.60%
Ecolab Inc ECL 0.90%
Emerson Electric Co EMR 2.60%
Exxon Mobil Corp XOM 2.80%
Family Dollar Stores Inc FDO 1.50%
Franklin Resources Inc BEN 0.80%
Genuine Parts Co GPC 2.70%
Grainger W.W. Inc GWW 1.40%
HCP Inc HCP 5.30%
Hormel Foods Corp HRL 1.60%
Illinois Tool Works Inc ITW 2.10%
Johnson & Johnson JNJ 2.80%
Kimberly-Clark KMB 3.00%
Leggett & Platt LEG 4.10%
Lowe’s Cos Inc LOW 1.50%
McCormick & Co MKC 2%
McDonald’s Corp MCD 3.30%
McGraw Hill Financial Inc MHFI 1.60%
Medtronic Inc MDT 1.90%
Nucor Corp NUE 2.70%
Pentair Ltd. PNR 1.40%
PepsiCo Inc PEP 2.60%
PPG Industries Inc PPG 1.30%
Procter & Gamble PG 2.90%
Sherwin-Williams Co SHW 1.10%
Sigma-Aldrich Corp SIAL 1%
Stanley Black & Decker SWK 2.50%
Sysco Corp SYY 3.30%
T Rowe Price Group Inc TROW 1.90%
Target Corp TGT 2.70%
VF Corp VFC 1.90%
Wal-Mart Stores WMT 2.40%
Walgreen Co WAG 2.10%

 

 

Fundamental analysis does not exactly correspond to the share price in the short term, but that’s when you can look for cheap stocks. If you want to do value investing, then you will have to invest in the long run in order to see the full potential of your investment performance. Anything other than that is pure speculation. So in addition to finding companies that exhibit great financials, a durable competitive advantage and intelligent managements are key factors in the rise in stock price over the long haul. And as you are holding to these stocks, periodic dividends and reinvestment of those dividends is one of the best ways of accumulating wealth and receiving passive income. A good company as mentioned will produce a lot of cash and will have growing earnings over the long run, so much so that it will be able to increase the dividends paid. So if you have chosen a “good” company yielding a 3% dividend and held over the long haul, then the income yielded will continually grow and increase as a percentage of what you invested in. As mentioned in the previous chapter, another way to receive passive income is through selling covered calls on those same stocks as well.

 

 

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