How to Analyse a Stock

When you start investing in stocks, it's important to be aware of the real value of a stock. That's why there are several different ratios that can help you analyse a stock. At the same time, there are several tips on how to use these ratios to your advantage.

How do you analyse a stock?

To get started with a stock analysis, you should first define which stock universe you want to invest in.
As a Danish investor, it may be easiest to start with Danish companies - but if you feel familiar with the Danish market, want greater risk diversification or companies that are not on the Danish market, you can look towards the foreign market.

Then it is important that you evaluate the company you are considering buying shares in. You should look at the owners, management and board. It is these people who drive the growth of the company, and it is growth that creates a return on your shares.

In addition, it is important that you pay attention to whether it is a well-known company or a newer and more unknown company when making your investment strategy. When looking for companies, it can be a good idea to find companies with good customer feedback, as these often tend to be successful in the long run; and in this way your shares will also be a good long-term investment.

Furthermore, it is important to look at how fast the company is growing, as well as what the profitability is on average for the industry - as well as how the company compares to other companies in this market.

P/E - Pricing-Earnings

The P/E is a ratio, also known as a multiple. This type of number gives you an idea of whether a stock is considered expensive or cheap. Since P/E stands for Price-Earnings, this number tells you how much you will pay for a penny's profit after tax if you choose to invest in the stock. A good rule of thumb to remember is that the higher the P/E number for a stock, the more expensive the stock.

Companies often use the P/E ratio when pricing a company. Therefore, you can use the P/E to compare company figures, for example in terms of sales and profits, against the given share price. Here it can be used to compare the stock with other stocks that are in the same sector.

To calculate the P/E ratio, divide the share price by the earnings per share of the company. This is also called Earnings per share, which you can read more about below.

An example of calculating the P/E ratio might look like this: If Company X has put a share up for sale at 200 kroner, while the company has earnings per share purchased of 10 kroner, the calculation for the P/E ratio will look like this:
PE = Share price / Earnings per share = 200 / 10 = 20

This means that Company X has a P/E value of 20. Put another way; you pay 20 crowns for every crown Company X actually earns on the share you bought from it. Although it may sound like a lot that you initially pay 200 crowns for 10 crowns of earnings, this is only the earnings in the first year. Once you have bought the share and own it, you are entitled to a share of the company's earnings for all the years you own that particular share.

However, it is important to understand that the P/E ratio cannot stand alone if you are analyzing a stock and the company behind it. Indeed, the P/E ratio is based on the previous year's earnings, which does not necessarily mean that this is how it will continue. It is therefore important that you include other ratios when analysing a stock - including Earnings per share.

PEG ratio

Once you have calculated the P/E ratio, it may be a good idea to look at the PEG ratio. The PEG ratio stands for price-to-earnings-to-growth. Here you look at the P/E divided by the growth rate of earnings, for a given period.

The PEG ratio is used to determine the value of a specific stock, as well as being used when looking at the company's expected earnings growth. Therefore, the PEG ratio is also considered a tool that provides a more complete picture than the standard PE ratio.
This means that the PEG ratio adds the expected earnings growth to the calculation, in conjunction with the PE.

However, it is important to be aware that the PEG ratio can vary significantly depending on the source from which you get the figure. This is because different sources use different growth estimates in their calculations - so it can be based on 1, 3 or 5 year growth.

EPS - Earnings Per Share

EPS is an abbreviation for earnings per share. It is the value that indicates the company behind the stock's earnings per share. In other words, this figure indicates the net profit of the company, divided into a company's outstanding shares.

EPS is important when it comes to analyzing stocks because, in the context of financial statements, it gives an idea of whether a company is living up to the expectations investors and analysts have, based on the financial statements that were presented to them.

This means that EPS is calculated on the basis of the most recently published financial statements of the company. Therefore, EPS is also relative to other factors in equity investing, such as the PEG ratio.

An example of calculating EPS might look like this: Company X has a profit for the year of 40 million, and also has 2 million in outstanding shares. This gives a calculation that looks like this:

EPS = Earnings / Shares Outstanding = 40,000,000 / 2,000,000 = 20
This means that earnings per share are DKK 20.

What do you need to remember when analysing a stock?

When you set out to analyse a stock, it is also important that you are able to answer the questions below before you begin the analysis:

  • What is the company doing in the market right now?
  • What business model is the company working with?
  • What industry is the company in and how does it look for this industry at the moment?
  • What are the future prospects for the specific industry? Is it a growing industry, is it mature or is it declining?

Stock analysis with StoxIQ

It can be difficult to make sense of all these key figures. By downloading the StoxIQ app, you'll be able to get an overview of these numbers when looking for upcoming investment opportunities.

Once you've signed up to our platform and set up your private investment profile, you'll be suggested stocks that match your preferences. You will then also be able to get an overview of what the different stocks entail.

Download StoxIQ today and start your investment adventure!

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