Question

Describe at least three indicators that you would use to determine whether the stocks are inexpensive.

How would use these indicators?

Answer 1

Solution:

We can use the following indicators to determine whether the stock is inexpensive

1. P/E ratio: If this ratio is lower than the industry average or relatively low then we can say that the stock is inexpensive.

2. P/B ratio: Share price / Book value per share - The lower the ratio the chances are that the stock is inexpensive. We can compare the value with the industry average

3. EV / EBIT: This can be used to compare the share price with the industry average. If this ratio is lower than the industry average means that the EBIT is higher and stock is inexpensive.