Buying Shares- undervalued companies

As written on previous post, we are now talking about how to find undervalued companies.

Anyone who can consistently get this right will end up astonishingly wealthy. Just ask Warren Buffett, the world's richest investor who is worth around US$ 52 billion.

His criteria is, seeking out and buying into companies with genuine business operations, sound fundamentals and good balance sheets - including low debt and high returns on equity - that are, for no particularly good reasons, out of favour with the market and resultantly priced below their intrinsic value.

Based on the above, Some analysts have worked out some of the methods for our reference.

One analyst says price-earnings ratio is not a good ratio to value a company. The main problem with PE ratios is that they only tell you about price. They don't tell you anything about value, because value is independent of price. Price is what you pay, value is what you get. Valuing businesses and assets has nothing to do with observing where the price is, or where it has been, or where it is going.

They determine a company's value using a number of inputs including return on equity, debt level and dividend payout ratio. In addition, They needs to determine whether a target company has the ability to convert $1 of retained earnings into at least $1 of additional market value and whether it has competent management with integrity that acts more like an owner than a caretaker.

It is difficult for us to follow their way of determination of the value of a company. So, some analysts recommends reading widely, noting the opinion of share analysts and favouring high-yielding, large-cap stocks (blue chips) with proven businesses and good management, while also taking note of their debt levels.

One analyst says one way to find value is to look for sound companies that have taken market punishment due to a short-term glitch, but whose long-term prospects remain favourable.

In conclusion, we should take note on three things, that is return on equity, debt level and dividend payout ratio and invest in blue chips.