Course 202: Analyzing a Company
Fourth Quality Check: Valuation
In this course
1 Introduction
2 First Quality Check: Growth
3 Second Quality Check: Profitability
4 Third Quality Check: Financial Health
5 Fourth Quality Check: Valuation
6 Put Them through the Wringer

Would you pay $100,000 for a car that might not start, that might lose a wheel after a few miles, or that might lose its door if you slam it too hard? Of course not. Yet people will pay extraordinary prices for firms managed by people who have little experience in their industry, that have yet to launch a product, or that could be out of business in a few years' time. That's where stock valuation comes in. Valuation tells you the relationship between what people are willing to pay for a stock (its price) and its underlying business, as measured by sales, or earnings, or something else. There are all kinds of valuation measures that you can use to determine how expensive a stock is; some of the most popular are price/earnings (P/E), price/sales (P/S), and price/book (P/B) ratios. We've also developed our own valuation measure, called the Morningstar business appraisal, which will be discussed in a later session.

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