How to evaluate undervalued stocks

Six questions behind a low multiple

Interpret valuation in the context of the business and its competitors.

1. How do P/E and P/B compare with similar companies in the same sector?
2. Are earnings recurring or boosted by one-off gains?
3. Are revenue, operating profit and EPS growing or falling?
4. Do reported assets generate returns, and could they be impaired?
5. How much debt and interest burden does the company carry?
6. Is there a credible catalyst for better returns or shareholder distributions?

A practical screen

Try P/E of 15 or less and P/B of 1 or less, then compare ROE, cash flow and balance-sheet strength. A company can remain inexpensive for sound reasons, including structural decline.

Avoid value traps

Check deteriorating core earnings, weak cash flow, asset quality and excessive debt. Verify current data and original filings before deciding.