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4. Analyzing Company Fundamentals > Calculate Additional Valuation Ratios

Calculate Additional Valuation Ratios

Finding good companies is only half the battle; buying them at the right price is the other. A number of valuation ratios help you figure out if the price is right.

Although the P/E ratio can help you determine a stock’s value, it can sometimes be misleading, particularly for companies that have recently issued a warning about their future earnings. Investors might have bid down the price of the stock based on those lowered expectations, resulting in an abnormally low P/E ratio for that company. In such a case, a low P/E ratio doesn’t reflect the true value of the company based on its future growth. On the other hand, companies that grow very quickly often have extraordinarily high P/E ratios. However, if those companies can continue to grow at the same pace, the rapid increase in earnings over time brings those P/E ratios back to more common values. Other valuation ratios can confirm or challenge the value shown by the P/E rat....


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