A stock is a security that represents ownership in a publicly traded company. Investors use a variety of tools to evaluate a stock’s intrinsic value and investment opportunity, such as calculating a discounted cash flow (DCF) model or comparing the stock’s price-to-earnings ratio to that of its peers. But while these metrics and ratios can help, looking at a single year or the current management team’s most recent decisions paints an incomplete picture of a company’s overall health. Moreover, investors need to consider a company’s qualitative strengths and weaknesses to determine the appropriate price to pay for a share of stock.

One of the most important considerations when evaluating a stock is to look at its historical valuation relative to other stocks in the market. Using this metric, investors can see whether a company is over- or undervalued, and adjust their buying decision accordingly. Valuation methods vary, but some of the most common include price-to-earnings, price-to-book value and price-to-sales ratio.

Companies create value in different ways, and some models may be better for valuing some types of companies than others. For example, price-to-book value works well for banks that accumulate assets and grow them, but it is less accurate for retailers who are trying to sell products.

While a stock can appear cheap, the company’s business conditions could be deteriorating and lead to a value trap. A pharma stock with valuable patents that expire soon, a cyclical stock near the peak of its cycle or a tech company whose once-innovative product is being commoditized are examples of this type of situation.

Investors can avoid these value traps by building a narrative about a company’s fundamentals, including its past track record and its future prospects. This narrative will give them a greater understanding of the company’s intrinsic value and its potential investment opportunity.

Other factors can also affect a company’s stock price, such as the possibility of a takeover. Bidders can make a higher offer for a company when its shares are cheaper, and the risk of a takeover is typically higher when the stock’s value is low.

For these reasons, it’s important to know how to identify dead stock, or inventory that is no longer selling, so you can run promotions to move it or send it to another region where it has a market. This will prevent your business from carrying unnecessary costs and wasting storage space that could be used for more profitable items. Phocas enables you to quickly assess the amount of stock that is no longer selling and take action before it becomes a financial burden.