He rarely invests in tech stocks because most of the time he doesn't understand them. This is not to say the technology sector is bad, but it's not Buffett's area of expertise; he doesn't feel comfortable investing in this area. Similarly, unless you understand a company's business model, you don't know what the Drivers are for future growth, and you leave yourself vulnerable to being blindsided shareholder .
Internal drivers are company factors that are directly related to the actual business in question. For example, liabilities, assets, revenue, income, products, management, etc. It is these characteristics in a company that you will be comparing to other companies in the same industry. This allows the trader to get a general understanding of where this company "sits" in relation to other companies with similar businesses. A trader can also use these internal numbers to calculate many different ratios that will help determine if the company is currently undervalued or overvalued
External drivers are factors which are outside the company's influence that can affect profitability. For example, the economy, inflation, interest rates etc. External drivers can be interpreted differently by different individuals (there is no magic formula).
Price/book ratio=Price per Share/Net Worth per share
The price-to-book value ratio, expressed as a multiple (i.e. how many times a company's stock is trading per share compared to the company's book value per share), is an indication of how much shareholders are paying for the net assets of a company.
The book value of a company is the value of a company's assets expressed on the balance sheet.
The price/book value ratio provides investors a way to compare the market value, or what they are paying for each share, to a conservative measure of the value of the firm.
If a company's stock price (market value) is lower than its book value, it indicates that the stock is being unfairly or incorrectly undervalued by investors and will eventually lift it to a much higher price level.
The P/E ratio of a stock (also called its "earnings multiple", or simply "multiple") is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share.
A higher P/E ratio means that investors are paying more for each unit of income
If earnings move up proportionally with share prices (or vice versa) the ratio stays the same. But if stock prices gain in value and earnings remain the same or go down, the P/E rises.
High P/E means high projected earnings in the future.
It's usually only useful to compare the P/E ratios of companies in the same industry, or to the market in general, or against the company's own historical P/E
The dividend yield is the dividend paid in the last accounting year divided by the current share price.
Income investors value a dividend-paying stock, while growth investors have little interest in dividends, preferring to capture large capital gains. Whatever the investing style, it is a matter of historical record that dividend-paying stocks have performed better than non-paying-dividend stocks over the long term.
A stock's dividend yield depends on the nature of a company's business, its posture in the marketplace (value or growth oriented), its earnings and cash flow, and its dividend policy.
For example, steady, mature businesses, such as utilities and banks, are generally good dividend payers.
For an income investor, a stock's dividend yield might well be the only valuation measurement that matters.
A company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.
For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or she holds.
One reason as to why stock splits are performed is that a company's share price has grown so high that to many investors, the shares are too expensive to buy in round lots.
Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors.
Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control.
Imagine a company has a net income of $10 million from sales of $100 million, giving it a profit margin of 10% ($10 million/$100 million). If in the next year net income rises to $15 million on sales of $200 million, the company's profit margin would fall to 7.5%. So while the company increased its net income, it has done so with diminishing profit margins.
The higher a company’s profit margin compared to its competitors, the better.
A ratio that indicates what proportion of Debt a company has relative to its Equity. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.
A debt ratio of greater than 1 indicates that a company has more debt than equity, meanwhile, a debt ratio of less than 1 indicates that a company has more equity than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk.
A higher debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings.