The price-profit ratio (KGV) is one of the most used key figures when evaluating shares. It enables investors to assess the value of a company relative to its profits. Investor legends such as Warren Buffett in particular regularly fall back on this key figure in order to identify attractive investment options.
• KGV is often used to evaluate shares
• KGV indicates how many years it would take for an investor to retain its commitment through the profits achieved
• Successful investors use the KGB
What is the price-profit ratio (KGV)?
The price-profit ratio (KGV) is one of the most frequently used key figures when evaluating shares. It represents a company’s share price in relation to its profit per share (Earnings via Share, EPS). The KGV states how many years it would take for an investor to retain its commitment by the profits achieved, assuming that the company’s profit remains constant. For example, if a share is traded at 100 euros and the profit is 10 euros per share, then the KGV is 10. A lower KGV can indicate that a share is cheap, while a higher KGV could mean that the share is acted more expensive – either due to growth expectations or an overvaluation.
Why is the KGV important for investors how Warren Buffett?
Warren Buffett, one of the most successful investors in the world, uses the KGV as one of its tools to evaluate stock investments. For Buffett, the goal of his investments is to identify undervalued companies that can generate significant value over time. The KGV helps him to view the evaluation of a company in the context of its profits.
Buffett’s focus is on the so -called “Value Investing”, which is based on the principles of his mentor Benjamin Graham, this Buffett mentioned in the Berkshire Hathaway Formerary letter from 1984. For Buffett, a low KGV indicates the possibility that a stock is traded below its inner value. However, he never uses the KGV isolated. It only serves as a first indication of potentially attractive shares. This is followed by a deeper analysis of the business model, the industry and the long -term perspectives of the company, according to the shareholder letter from the Berkshire Hathaway.
The KGV in the context of other key figures
Although the KGV is a valuable key figure, it should never be used alone to assess a company. The KGV provides a first indication of the evaluation in relation to the profits, but it is only a piece of the puzzle in the larger picture of the company analysis. The important complementary key figures include, for example, the course book value ratio (KBV), which puts a company’s share price in relation to the book value of its equity. A lower KBV can indicate that a share is undervalued in relation to the material assets, explains the Comdirect Magazin. Especially in capital -intensive industries such as industry, it is helpful to look at the KGV and KBV together in order to get a clearer picture of the evaluation of a company.
Investors should also take into account the degree of debt of a company. A company with high debt could generate profits at short notice, but there is a risk that it will be burdened by high interest payments, which could reduce profits in the future. Therefore, the KGV should always be considered in connection with the debt in order to correctly assess the risk of an investment.
Editor finance.net
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