Risk Management 101: The Criteria

[Buylow]

The Criteria
As with any investment, determining a company to put your money in can’t be done just by looking at the share price.

There are other fundamental characteristics that make a stock valuable or risky.

Here are some of the things to look at when determining whether a company is worth the risk of investing in or not:

• Price-to-sales ratio — This is calculated by taking the number of outstanding shares a company has and multiplying the share price. Usually, a lower P/S means a more attractive investment, but not all the time.
• Price-to-book ratio — This is calculated by dividing the company share price by its book value per share. That book value is the total assets minus liabilities. Like the P/S, a lower P/B can signal an undervalued company.
• Price-to-earnings ratio — The P/E or PER measures the current share price relative to its per-share earnings.

Remember, not one of these ratios alone determines the value of a company. Sometimes one ratio is high while the other two are low.

Also, you have to know each sector has averages for each ratio. Each sector is different from each other in varying degrees, knowing those averages can tell you how a company performs relative to its sector for a more accurate risk assessment.

Remember, if your not trading for the LONG TERM, no matter the stock or company... consider it RISKY...because it is!

Trade on Traders!

 

[Sekiyo]

From "The Flaw of averages"
Whenever faced with uncertainties use distributions and simulations, not averages.

Remember, if your not trading for the LONG TERM, no matter the stock or company... consider it RISKY...because it is!

Because your portfolio will be variance (risk) free if you invest LONG TERM ?

As with any investment, determining a company to put your money in can’t be done just by looking at the share price.

Why ? Don't you think all the available and public information isn't priced in already ?
What's the link between financial ratios based on history and future earnings and stock price ?

Remember, not one of these ratios alone determines the value of a company. Sometimes one ratio is high while the other two are low.

Don't you think the value of a company is the difference between its potential and its actual price, performance ?

Can I recommend
"Narrative and Numbers: The Value of Stories in Business" ?

From a review:
"The procedure of valuing a stock through is rather simple once it has been learnt. And when looking in retrospect on why old valuations turn out to be incorrect it is rarely due to getting the mechanics of the valuation tool wrong. Instead it is almost always because the sales or profits turned out very differently from what was forecasted since the company, its strategy or business environment developed in an unanticipated way – the narrative was wrong."

Ps: I believe current quantities to be anchors to future ones.
Value: Future historical performance =! Implied performance.

The greater the misconception, the greater the value, the worthier the risk.

 

[Sekiyo]

Also ...
Don't mistake risk for reward.
Don't mistake risk management for profitability.

It sounds like you mistake some concept for others.
But if in practice it works for you it's fine.
What we say =! What we do.

 

[smallfil]

That is not risk management. Look it up. Lots of You Tube videos too. Using financial ratios as a measure will not help you if you risk too much on any given trade. That is what matters and separates those who blow up their accounts and those who are able to survive long enough to figure out how to trade stocks.

 

[Teryc20]

Also ...
Don't mistake risk for reward.
Don't mistake risk management for profitability.

I agree on that; mostly traders miss on that.