3 ms·

One common approach for valuation is to use comparable companies as a benchmark. This is where you take a similar company's financial statements and compare the

One common approach for valuation is to use comparable companies as a benchmark. This is where you take a similar company's financial statements and compare the relative valuation. The first step is to identify similar companies and do a search for their valuations. Once you have similar companies, you can use ratio like price/earnings to compare them. good luck.

nicholas73 8y ago
More likely the company at this stage is evaluated on earnings growth, not absolute earnings. Or more nebulous, $/user. But it's a way to mentally check whether the valuation is reasonable. Will the earnings growth grow into a stable earnings fit for its market cap? A mature best of breed company (S&P average) gets something like 22 P/E right now, but historically that fluctuates as well based on earnings outlook and interest rates (which are still historically low). The last point on interest rates is overlooked by casual investors. Interest rates drive valuation, because the risk-free Treasuries rate is the ultimate comparable to other investments. Not only does it cause the P/E of mature companies to blow up as people chase yield, it forces hot money to chase earnings growth as prospective returns get miniscule. It also gives funds massive borrowing power. Basically, consider the risk of the whole thing blowing up even if the company does not. The last line sounds scary, and it could be, and if you don't know it's the thing to really consider. Risk versus reward. Selling half seems like a brainless way to make a decision, but the benefit of this is that it actually lets you make a decision (you win psychologically both ways). Companies do not do stock tenders all that often and it could be a good sign. But it also happens that companies buy during good times when cash is flush.

3 ms·

One common approach for valuation is to use comparable companies as a benchmark. This is where you take a similar company's financial statements and compare the

by pleinair7 8y ago

nicholas73 8y ago
More likely the company at this stage is evaluated on earnings growth, not absolute earnings. Or more nebulous, $/user. But it's a way to mentally check whether the valuation is reasonable. Will the earnings growth grow into a stable earnings fit for its market cap? A mature best of breed company (S&P average) gets something like 22 P/E right now, but historically that fluctuates as well based on earnings outlook and interest rates (which are still historically low). The last point on interest rates is overlooked by casual investors. Interest rates drive valuation, because the risk-free Treasuries rate is the ultimate comparable to other investments. Not only does it cause the P/E of mature companies to blow up as people chase yield, it forces hot money to chase earnings growth as prospective returns get miniscule. It also gives funds massive borrowing power. Basically, consider the risk of the whole thing blowing up even if the company does not. The last line sounds scary, and it could be, and if you don't know it's the thing to really consider. Risk versus reward. Selling half seems like a brainless way to make a decision, but the benefit of this is that it actually lets you make a decision (you win psychologically both ways). Companies do not do stock tenders all that often and it could be a good sign. But it also happens that companies buy during good times when cash is flush.