Many investors find the qualitative part of analysis — examination of the competence of management and the strength of the company's strategies — makes more intuitive sense than valuation. But you may have a real interest in understanding how an analyst examines fundamental numbers to calculate what a stock is worth.

When it comes to physical assets like houses or jewelry, valuation is a straightforward appraisal of current worth. But when it comes to stock valuation, analysts are attempting to evaluate stocks you might buy today in terms of their future worth. Because this is a more complicated question, and because the value of a stock depends on so many factors, there are several ways to evaluate a company, and an analyst report may use one or many.

Valuation is also where all those numbers and acronyms come in — the part of the report that many investors would rather skip. However, once you understand what the numbers have the potential to tell you, you may be much more interested in what you'll see.

Sam Stovall,
Chief Investment Strategist at Standard & Poor’s

BACK