Share this Page URL

Lesson 12. Evaluating Stocks > The Price/Earnings Ratio - Pg. 72

Evaluating Stocks Plain English 72 Book value is a simplistic measurement of the total value of a company. It is determined by adding up the values of all tangible assets. I am not going to give you the formula for determining the book value, because it is one of those statistics that requires spreadsheets, algebraic calculations, and a Ph.D. in mathematics. Suffice it to say that, like any of the preceding measurements, the book value should be used in context with book values of other stocks within the same industry, as well as the same stock's own previous performance. In addition, the book value has another use. Investors routinely compare the book value with the current market price of the stock to determine how far away from its actual value the stock is trading. As a very general guideline, stocks typically trade at one to two times their book value. Higher book values are certainly more desirable. However, I can't stress enough that, by themselves, these measurements may not necessarily accurately depict the company. You're going to have to do your homework. The more you learn, the better your investment decisions will be. Credit Ratings In the current and debt ratio example, we discussed how much debt you and your brother were carrying and how effectively you were each handling it. As individuals, much of this information about you would be available by means of a credit report to anyone who was entitled to see it. With the information on a credit report, entities like mortgage banks and car lease companies can determine whether or not you or your brother would meet their specific minimal criteria. Wouldn't it be a great world if someone would step in and figure out that kind of stuff for you in the stock market? Luckily for you, a number of companies do exactly that. Stocks, like people, get assigned a credit rating, and that credit rating can be used to determine any number of things,