With many parameters being examined in stock picking today, it is almost impossible to find value picks that fulfill all parameters at the same time. However, there are certain parameters that one must examine before buying a value stock or share.
1) Price to earnings ratio
It's almost impossible to find an analyst whose very first parameter is not the price to earnings ratio. Price to earnings ratio is got by dividing the price by the EPS. If the EPS of a stock is Rs 25 and the price is Rs 200, we say the stock is attractively priced at a p/e of 8 times.
However, this has not to be taken in isolation and one needs to consider other factors like growth and risks. A company that is not growing will have a low p/e value. For example, at the moment PSU baking stocks in India have low price to earnings ratio simply because they have high non performing assets. Therefore, you cannot see p/e in isolation. But in general if all things are good then a stock with a price to earnings ratio of less than 10 could be considered as a value pick.
Sensex companies are at the moment trading at price to earnings ratio of around 17 times. For example, a stock like BPCL is trading at just 8.32 times. Considering various other paremeters it could be a good pick against the backdrop of falling all prices.
2) Price to book value (P/BV)
This is again an important indicator for a value pick stock. Again, if you see a stock like BPCL it is trading at a price to book value of 2.8 times. Anything under three could be considered fair, if the company is growing. PSU banks are today trading at price to book value of 0.50 times. But, because one has concerns over non performing assets, nobody is buying the stock. Therefore, one cannot study only p/bv in isolation. One has to see other factors as well.
3) Dividend yield
Dividend yield is nothing but the dividend that you would receive against the purchase price. For example, if you purchase shares aggregating Rs 10,000 and you get a dividend of Rs 500, we say the dividend yield is 5 per cent.
A stock like NMDC gives a dividend yield of almost 7%. But, the stock does not rise quickly because of other factors. So, dividend yield has to be read along with other parameters as mentioned above.
4) Profit growth in the last 5 years
Look at the annualised profit growth in the last 5 years. If profits are not growing at 15-20 per cent, the stocks may not be worthwhile picks. Several blue chip companies like Jubilant Foodworks, HDFC Bank etc., command premium valuations because they are growing at superb rates.
5) Cash flows
Study companies that have year on year seen positive cash flows. Another important parameter would also be the level of debt on the companies books.
As mentioned earlier it is very important to study all parameters together and not in isolation. If the stocks broadly meet the above requirements, they could be considered as value picks.