Today in this post we will understand that higher price stock doesn’t mean a lower return on investment amount.
We are in a generation of smartphone where a new phone is launched every alternate day and we change smartphone every 2 years. We select a new phone by selecting higher RAM, storage, speed. This shows that whatever is higher is more valuable and better. In the end, we also check our budget and necessity before making any decision to buy a smartphone.
We should apply the same common sense while buying stocks. There are more than 5000 companies listed on NSE. Some of the stocks worth more than 50,000 Rs and some below 10 Rs. It doesn’t mean that you should go and accumulate the stocks which are less than 10 Rs.
Then how to check whether a particular stock is worth buying or not?
When anyone is buying stock of a company, it means that person is buying part of the business of the company. This directly means that the stock should be valued in terms of the profitability of the running business of the company. So, before investing in the company we should evaluate the business on different parameters like present status, future goals, the management of the company, the product or services offered by company etc.
Note that I have not even discussed the stock price of the company yet because that is the last thing an investor should look upon.
Example of MRF & Apollo Tyres
Let us take an example of a company named MRF, Stock price Rs 64,100. Yes, this stock seems to be very expensive and I am sure you will not be willing to buy this stock. but as said above before buying any company we should check the valuations of the business.
Check the details of competitors of MRF. Above data says some the information about the company. Note that MRF has maximum sales turnover and net profit. Which says that the company is doing very good business compared to its peers.
Now check this data of MRF
And this for Apollo Tyres
Have a look at EPS of MRF and Apollo Tyres. EPS is the calculated by dividing profit by no. of shares outstanding for a company.
Clearly, data says that EPS of MRF is 202 times of EPS of Apollo Tyres.
Now we know, why MRF is expensive among peers. Its EPS is way higher compared to its peers. The PE ratio of MRF is also less than Apollo tyres which tell us that buying MRF is better than Apollo Tyres.
There are other factors also responsible which are not considered for checking the valuation of both companies.
Hope you were able to understand that stock price should be never considered as a factor for investment in any company.
Read: How to invest when the market is all time high?
Thanks for reading.