There are a few simple ratios I use:

The simplest definition of Book Value as it relates to individual stocks is assets minus liabilities. It is expressed as a per share value, just like a stock price. For a value-oriented investor, Book Value provides an effective means to determine how undervalued a stock might be.

In the letters he is famous for including with the annual reports for Berkshire Hathaway, Warren Buffett has referred to Book Value as the amount shareholders would receive today if a company closed its doors, paid all of its remaining expenses and liabilities, and its assets were liquidated. I like to think of Book Value as an expression of a stock’s

Fundamental and value-oriented analysts use a stock’s

Price/Earnings ratios, or P/E ratios have long been one of the most commonly used and accepted quick-glance measurements of whether a stock’s current price is undervalued or overvalued. Depending on the service you get this number from, it could be based on the last twelve months’ worth of information (which is commonly called

In a similar fashion as with its Book Value, it is entirely normal for a stock’s trading price to be several multiples higher than its earnings per share. One of the big differences is that since earnings per share are usually a smaller number than the stock’s Book Value, P/E ratios will almost always be higher than Price/Book ratios. Analysts also like to compare this value with a stock’s industry group, since some industry groups are accepted by investors at large as trading at higher multiples than others. For example, finding a stock with a P/E ratio of 12, in an industry group with an average P/E ratio of 20, may be a good indication you’ve found an undervalued stock with a great investment opportunity.

You can think of the P/E ratio as being an expression of how much investors are willing to pay for a dollar of that stock’s earnings. This is a useful approach, since it gives you a way to use historical P/E information. If a stock’s historical average for the last few years shows the stock usually trades around 17 times earnings, but it is currently below that number, the stock could be undervalued, since investors are usually willing to pay more. You might have an opportunity to get in before everybody else starts to notice the discrepancy and pushes the stock back up to its historical norms.

One of the limitations of P/E ratios—as with a stock’s Price/Book ratio—is that a low P/E ratio gives no additional insight; it doesn’t, for example, provide any information about

Investors and analysts who rely on fundamental and value-focused analysis often exclude any evaluation of a stock’s current price activity from their system. The logic behind doing so suggests that if a stock’s current price represents a bargain relative to its intrinsic value, where the stock is trading relative to historical patterns is irrelevant. The bargain status implies the stock

In ideal terms, investing should always be done objectively, based on solid, established and proven principles, and executed in the same fashion on each and every trade. The weak link for every investor, no matter how experienced or knowledgeable we may be, is the natural tendency we all have to impose our own emotions, and therefore our imperfect subjectivity, on those investments. We aren’t computers, and the simple fact is that any time we’re about to put real money at risk, our emotions come into play. Ignoring a stock’s historical price activity in your analysis actually exposes you to even more emotion-based risk, because it encourages you to dismiss any consideration of whether the stock may be more likely to go up or down—in possibly dramatic fashion—in the near term.

Instead of relying exclusively on measurable data points like Book Value and P/E ratios, I think it’s smarter to use a stock’s historical price action; in part, I’ve found it helps me to minimize and manage the emotional expectations that naturally emerge with each investment I make. In this sense, I’ve incorporated many of the same analytical principles that are the cornerstones of shorter-term trading methods like swing and trend trading. While I don’t attempt to “time” my entries or exits based on this information, being able to recognize historical price swings and trend reversals, and identify current trends across multiple time periods provides a better overall understanding and perspective of a stock’s current market risk or opportunity.

Under ideal circumstances, an undervalued stock is at, near, or below its Book Value, with a P/E ratio below the industry average, and trading at or near historical lows. When all three elements are in place, it becomes much easier to commit hard-earned investing capital to a stock. It also makes managing the emotion of the investment after it’s made less stressful. None of these three elements guarantee the stock

- Book Value
- Price/Earnings Ratio
- Current Price versus Historical Levels

**Book Value**The simplest definition of Book Value as it relates to individual stocks is assets minus liabilities. It is expressed as a per share value, just like a stock price. For a value-oriented investor, Book Value provides an effective means to determine how undervalued a stock might be.

In the letters he is famous for including with the annual reports for Berkshire Hathaway, Warren Buffett has referred to Book Value as the amount shareholders would receive today if a company closed its doors, paid all of its remaining expenses and liabilities, and its assets were liquidated. I like to think of Book Value as an expression of a stock’s

*intrinsic value*– the portion of a stock’s price that can be tied to its business and management strength.Fundamental and value-oriented analysts use a stock’s

*Price/Book ratio*as a quick-glance view of where a stock’s current price is in relation to its Book Value. A ratio of 1 implies an equal relationship between the two, while a number below 1 means the stock is trading below its Book Value and a number above 1 means the stock is trading above its Book Value. An ideal stock for the*Rebel Income*investing system will be near to its Book Value, or at least significantly below its historical Price/Book ratio average, with solid fundamentals across the board based on the data listed in the previous section.**Price/Earnings (P/E) Ratio**Price/Earnings ratios, or P/E ratios have long been one of the most commonly used and accepted quick-glance measurements of whether a stock’s current price is undervalued or overvalued. Depending on the service you get this number from, it could be based on the last twelve months’ worth of information (which is commonly called

*trailing twelve months, or TTM*) or on the most recently reported quarter (MRQ). The calculation is simple: divide the stock’s current price by its earnings per share (EPS). The result is a multiple of the stock’s earnings per share. For example, if a stock’s EPS for the last twelve months is $3.00 per share and their current price is $30 per share, the P/E ratio is 10, meaning that the stock is trading 10 times higher than its earnings per share.In a similar fashion as with its Book Value, it is entirely normal for a stock’s trading price to be several multiples higher than its earnings per share. One of the big differences is that since earnings per share are usually a smaller number than the stock’s Book Value, P/E ratios will almost always be higher than Price/Book ratios. Analysts also like to compare this value with a stock’s industry group, since some industry groups are accepted by investors at large as trading at higher multiples than others. For example, finding a stock with a P/E ratio of 12, in an industry group with an average P/E ratio of 20, may be a good indication you’ve found an undervalued stock with a great investment opportunity.

You can think of the P/E ratio as being an expression of how much investors are willing to pay for a dollar of that stock’s earnings. This is a useful approach, since it gives you a way to use historical P/E information. If a stock’s historical average for the last few years shows the stock usually trades around 17 times earnings, but it is currently below that number, the stock could be undervalued, since investors are usually willing to pay more. You might have an opportunity to get in before everybody else starts to notice the discrepancy and pushes the stock back up to its historical norms.

One of the limitations of P/E ratios—as with a stock’s Price/Book ratio—is that a low P/E ratio gives no additional insight; it doesn’t, for example, provide any information about

*why*the stock’s P/E ratio is low right now. It could be a function of market trends, or possibly of fundamental deterioration in other areas of the company’s business. Sometimes stocks get pushed to historical lows because the company is facing new, serious challenges that threaten its ability to stay in business. This is why I*never*use a stock’s P/E ratio alone as a barometer of a company’s value proposition. I’ve built the*Rebel Income*system to incorporate P/E ratios only as a*supplement*to a stock’s overall fundamental profile and Price/Book ratio. If the fundamentals are solid, the Price/Book ratio is attractive, and its P/E ratio is lower than normal, then the stock is pretty close to the “sweet spot” I’m trying to hit.**Current Price versus Historical Levels**Investors and analysts who rely on fundamental and value-focused analysis often exclude any evaluation of a stock’s current price activity from their system. The logic behind doing so suggests that if a stock’s current price represents a bargain relative to its intrinsic value, where the stock is trading relative to historical patterns is irrelevant. The bargain status implies the stock

*should*be worth more than it currently is, and that should be the overriding concern for the purposes of making an investment decision. The longer I work with the market, the more I disagree with this logic; that’s why I’ve made analysis of a stock’s current price relative to previous price activity the third part of my value-oriented analysis.In ideal terms, investing should always be done objectively, based on solid, established and proven principles, and executed in the same fashion on each and every trade. The weak link for every investor, no matter how experienced or knowledgeable we may be, is the natural tendency we all have to impose our own emotions, and therefore our imperfect subjectivity, on those investments. We aren’t computers, and the simple fact is that any time we’re about to put real money at risk, our emotions come into play. Ignoring a stock’s historical price activity in your analysis actually exposes you to even more emotion-based risk, because it encourages you to dismiss any consideration of whether the stock may be more likely to go up or down—in possibly dramatic fashion—in the near term.

Instead of relying exclusively on measurable data points like Book Value and P/E ratios, I think it’s smarter to use a stock’s historical price action; in part, I’ve found it helps me to minimize and manage the emotional expectations that naturally emerge with each investment I make. In this sense, I’ve incorporated many of the same analytical principles that are the cornerstones of shorter-term trading methods like swing and trend trading. While I don’t attempt to “time” my entries or exits based on this information, being able to recognize historical price swings and trend reversals, and identify current trends across multiple time periods provides a better overall understanding and perspective of a stock’s current market risk or opportunity.

Under ideal circumstances, an undervalued stock is at, near, or below its Book Value, with a P/E ratio below the industry average, and trading at or near historical lows. When all three elements are in place, it becomes much easier to commit hard-earned investing capital to a stock. It also makes managing the emotion of the investment after it’s made less stressful. None of these three elements guarantee the stock

*will*go up in the short-term, or even within a few months; but they are a strong indication that the company’s intrinsic value is higher than its current trading price. The investors that can recognize this reality before the rest of the market does are the ones that, like Benjamin Graham, Warren Buffett, and many of the most successful investors in the history of the financial markets, will best be able to weather economic storms and the ebbs and flows of market cycles and come out ahead of the game.