Overvalued or Undervalued?

Looks like you need a few more courses.

All of my work is regarding fundamental ratios, not current ratios because I'm looking at the long run picture...so stuff like earnings per share surely doesn't impact my long run prospects?

What Flake said. Or, more efficiently in most situations, look for and buy a good book on the subject. I can't think of any at the moment but someone else can probably help with that. Research the difference between fundamental and technical analysis. Not sure what you mean by fundamental ratios vs. current ratios because the current ratio is part of fundamental analysis.

The DCF is the "five paragraph essay" of finance

^ i would refine that to say investment banking

Ratio's are actually grounded in fundamentals. Take the P/E ratio. The price, for argumrnts sake, can be calculated using the Gordon's Growth Model:

Price = D/(r-g)

If you divide both sides by earnings, you get this:

Price/Earnings =(D/E)/(r-g) where D/E is the payout ratio (dividends out of earnings).

Now, where does "g" come from? Well its the return you can earn on reinvested earnings, so ROE*RR, where RR is your retention ratio.

So....the justified P/E ratio is a function of 3 things, long-term ROE (use the DuPont model to analyse this), cost of equity, and the payout ratio.

The great thing about this is you can figure out what market prices imply about each of these fundamental factors.

wow thank you all for giving me your opinions and advice. i'm doing a lot of research right now on all of the ratios to see where they come from, its evident i didnt really understand them in detail, and still dont, so the insight all of you are giving is brilliant, thanks.

so, also, when equity analysts give valuation..and say BUY or SELL...they must be comparing their own value (from the ratios etc) to some figure? what is that figure? market capitalization (i.e. a general value which every different research analyst can use for comparison)? or some sort of DCF analysis aswell (i.e. they compare their own valuation to, essentially their own valuation) if that makes sense...so what are they comparing their 'report' to?

that might be a stupid question, apologies if it is, i guess im thinking reports must need to be made every day since every day market capitalization / dcf values change based on every metric...so what do they compare their over/under valued opinion to?

reports are typically put out once a quarter, following earnings release and guidance (if given). or special reports will be put out after big announcements, i.e. acquisitions, new contract wins, etc.

let's say an analyst thinks a company should be, and historically has, traded at 20 times NTM EPS (given growth prospects, profitability, etc) , and expects EPS to be $2.00 in the upcoming year. the analyst would place a target price or fair value at $40, which is 20*2.

most firms have some system that says the analyst must recommend a BUY if the fair value is 15% above the current price, SELL if less than the fair price, and HOLD if somewhere in between.

so in the example above, lets say the stock was currently trading at $30. the analyst would issue a buy with a 33% upside. lets say the stock jumps to $40 in the next week and no news has come out suggesting the EPS estimates should be changed. the analyst MIGHT release an update saying upside is gone and fair value is nearly equivalent to the market price, so change the recommendation to HOLD. but most analysts are too lazy to do that. really only see that with the BB banks and in reports following high-volume companies.

i think the best way to learn about this is to pick a company (not energy, healthcare or something complicated). Retail is usually pretty straightforward, so choose something like Gap, Starbucks, etc.

Value it using public comps and historical multiples. and then read every analyst report under the sun on that company and refine your valuation, noting differences between yours and theirs. follow the company daily, sign up to receive their press releases and read the analyst reports when they come out... you'll catch on after about 6 months (2 quarters).