Finance & Algoritm - Portfolio

From Undervalued to Overperforming: Stocks in Focus

I am creating a table of financial ratios that can be a helpful tool for analyzing and identifying undervalued stocks. There are several key ratios that investors commonly use for this purpose. Here’s a table template you can use to organize and calculate these ratios:

I am adding optimal value limits or filtering criteria for each ratio can help you identify stocks that meet specific criteria for undervaluation or other financial metrics.

Keep in mind that these limits are general guidelines and may vary depending on industry, market conditions, and your specific investment goals.

RatioFormulaDescriptionOptimum Value Limit
Price-to-Earnings (P/E) RatioPrice per Share / Earnings per ShareMeasures how much investors are willing to pay for each dollar of earnings. Lower is usually better.Typically below industry average.
Price-to-Book (P/B) RatioPrice per Share / Book Value per ShareCompares the stock’s market price to its book value. A ratio below 1 may indicate undervaluation.Typically below 1.0.
Price-to-Sales (P/S) RatioPrice per Share / Sales per ShareEvaluates how the market values each dollar of a company’s sales. Lower ratios can be favorable.Depends on industry, but below industry average.
Price-to-Cash Flow (P/CF) RatioPrice per Share / Cash Flow per ShareMeasures the price relative to the company’s cash flow, a lower ratio may suggest undervaluation.Typically below industry average.
Dividend YieldDividend per Share / Price per ShareIndicates the percentage return from dividends. A higher yield might suggest undervaluation.Depends on your yield target, but higher is often better.
Earnings Growth Rate(Current Earnings – Past Earnings) / Past EarningsExamines the rate at which earnings are growing. Higher growth rates are often preferable.Typically above industry average.
Debt-to-Equity RatioTotal Debt / Total EquityEvaluates the company’s financial leverage. A lower ratio may indicate a safer investment.Depends on industry, but lower is generally better.
Current RatioCurrent Assets / Current LiabilitiesMeasures a company’s ability to cover its short-term obligations. Higher is generally better.Typically above 1.0.
Quick Ratio (Acid-Test Ratio)(Current Assets – Inventory) / Current LiabilitiesA stricter measure of short-term liquidity that excludes inventory. Higher is better.Typically above 1.0.
Return on Equity (ROE)Net Income / Shareholders’ EquityReflects how efficiently a company generates profits from shareholders’ equity. Higher is better.Typically above industry average.

These optimal value limits can serve as a starting point for your stock screening process. However, it’s important to consider industry benchmarks and the company’s specific circumstances when determining whether a stock is undervalued or meets your investment criteria. Additionally, conducting thorough research and analysis is essential before making investment decisions.