All About Popular Screens for Value Investing

In previous chapters, we explored the concept of value investing in detail. To quickly revisit, a value stock is typically a stock available at a price lower than its intrinsic worth a true bargain for discerning investors. To qualify as a value stock, certain parameters must indicate its undervaluation. Understanding these will help you make more informed investing decisions in the value investing space. 

Below are the primary factors that assist in identifying value stocks: 

Price/Earnings (PE) Ratio 

The PE ratio is the current share price divided by the earnings per share (EPS) and reflects how much the market values every rupee of the company's earnings. 

For example: If the share price is ₹200 and EPS is ₹20, the PE ratio would be 10, meaning investors are willing to pay ₹10 for every ₹1 the company earns. 

From a value investing perspective, this metric becomes especially insightful. 
Consider two stocks, A and B: 

• Stock A trades at ₹100, Stock B at ₹80. 
  At first glance, Stock B seems cheaper. 
  However, if the industry PE is 20, and Stock A’s PE is 20 while Stock B’s PE is 35, Stock A is actually undervalued relative to earnings, despite the higher share price. 
  Stock B’s higher valuation is based on future expectations, whereas Stock A offers present intrinsic value. 

Book Value (B/V) 

Book Value is a crucial metric in value investing. It represents a company's total assets minus liabilities, divided by the number of outstanding shares. 

Investors and analysts highly regard book value because it is rooted in historical financial data, offering an objective measure of a company’s net worth. 

• If the book value exceeds the current share price, the stock may be undervalued. 

• Industries like cement and steel, which are asset-heavy, often show a higher book value compared to technology firms. 

It’s important to note that a share price higher than the book value doesn't always imply overvaluation. The market may be pricing in intangible assets like patents or brand value. 

Debt-to-Equity (D/E) Ratio 

The Debt-to-Equity ratio evaluates a company's financial leverage by comparing its total debt to shareholder equity. 

In essence, excessive debt is risky, much like personal finances. However, acceptable debt levels vary by industry. 

• A lower D/E ratio usually indicates a company is financed more through equity than debt. 

• For example, a company with ₹20 crore in debt and ₹50 crore in equity has a D/E ratio of 0.40, meaning ₹0.40 debt for every ₹1 of equity. 

While high debt can be a red flag, it is manageable if the company has strong, consistent cash flows. However, for companies struggling with revenue, high debt poses a significant risk. 

Earnings Growth 

Earnings growth provides a simple yet powerful glimpse into a company's profitability trends. 

In value investing, the focus is less on speculative future earnings and more on consistent historical profitability. 

• The key measure is the Earnings Per Share (EPS), which is calculated as net profits divided by the equity base. 

• Value investors prioritize steady EPS growth over multiple years, rather than quarterly fluctuations. 

This long-term perspective ensures that investments are based on proven financial strength rather than uncertain projections. 

Dividend Payout 

Regular dividend distribution is a hallmark of financially sound companies and an attractive feature for value investors. 

In value investing, where capital appreciation may be slower compared to growth investing, dividends help generate a steady income stream. 

• For instance, if a company earns ₹10 crore in profits and pays ₹4 crore in dividends, its payout ratio is 40%. 

Such consistent payouts indicate that the company values shareholder returns while maintaining sufficient reserves for business reinvestment. 

Points to Remember 

• Screeners are helpful starting points, but no single metric should be considered in isolation. 

• A multi-faceted analysis ensures you identify truly undervalued companies worth holding for the long term. 

• Focus on quality over quantity, and remain patient to reap the benefits of value investing.