In the valuation of a company what are the best ratios to use?

Question

The problem I have is finding a company that undervalued at around 20% or less to invest in.

Answer 1

When you speak of valuation, are you referring to market value or the intrinsic value of the company?

If you mean market value, then the P/E may be useful.  For example, BIDU was trading with a P/E of 80 which fell to 40 or 50%.  BIDU is now trading with a P/E of about 120.  The stock price is up 75%.

If you mean intrinsic value, then break the paper and pencil.  The Discounted Cash Flow model is a common tool.  Essentially, you forecast future earnings and margin growth then deduct a percentage (your margin for error).  This tells you what the company's worth.

You can calculate it yourself, or you can subscribe to Morningstar or S&P stock reports and use their fair value calculation.