A Beginner Guide to Stock Picking in 2025

Are you a beginner investor embarking on the adventurous journey of stock investment? But tired of reading and skimming through the long financial reports to evaluate or pick a stock? Or perhaps, worried that the current AI assistants might not produce the right results for stock valuation due to hallucination? What are the quick ways to extract the essential elements from the financial reports to evaluate a stock using current online tools like Yahoo Finance?  

But perhaps you are also struggling with finding the best metrics to evaluate a stock? What ratios and formulas do you need when picking and evaluating a stock? Which ratios can tell you that a particular stock is overvalued or undervalued? How to roughly determine the intrinsic value of the stock? In this post, I will present a brief overview of some of the most useful formulas for stock selection that anyone can use as an initial criterion to pick the stocks of their choice. These stock selection criteria were mentioned in the two famous books on investing: (1) The Intelligent Investor by Benjamin Graham (The teacher of Warren Buffett), (2) One Up on Wall Street by Peter Lynch.

Price-to-Earning (P/E) Ratio

What is the P/E ratio? Why is the P/E ratio an important criterion when evaluating the stock? How to view the stock if its P/E ratio is high? Also, what is the importance of a low P/E value of the stock? These questions are often asked when this ratio pops up. Let’s answer these questions one by one. 

Simply to say, the P/E ratio is the current market price divided by the latest earnings in the last quarter or the last annual report. The P/E ratio is one of the key determinants of evaluating the stock. Most of the value investors take a careful look at the P/E ratio when evaluating a stock. 

The P/E ratio depicts how much premium you need to pay for the stock. For example, if the stock P/E ratio is 15. It means that for each 1$/share earnings of the stock, you are paying 15$/share as a premium. For a traditional value investor, the P/E ratio of the stock should not be more than 15, otherwise they would consider the stock as over-valued. A P/E value of less than 15 is considered acceptable for most traditional value investors.

However, if we check out the growth stock, the P/E ratio is always greater than 15. What shall one do for the growth stock when its P/E ratio is such a high value? The high P/E ratio can be acceptable to an investor if the stock of the company has an economic moat. Now, what is an economic moat? It is the distinct advantage that a company has over its competitors. Think about NVIDIA or Taiwan Semiconductor Company (TSMC). Both of these companies have an economic moat: NVIDIA in GPU design, and TSMC in the design of 2nm chips. These companies do have competitors, but they are quite far behind them. Thus, with such a company, some investor will accept a high P/E value as these companies’ growth has not been challenged by their competitors in the near short-term. 

However, for the defensive stocks, like oil, steel, commodities, etc, one has to pay close attention to the P/E value. A high P/E value for these would likely trigger the alarm of overvaluation. But even for defensive stocks, sometimes and high P/E value is acceptable. In what cases is a high P/E value for the defensive stock acceptable? To answer this question, we need to first understand the book value per share.

Book Value/Share (BVPS)

Before discussing the book value per share, let’s create the following questions: What is the book value per share of the company? How to understand the relationship between the book value per share with the price of the stock? How to relate a book value per share to the P/E of the stock? 

To answer the first question, the book value of the stock of the company is the total assets minus its total liabilities divided by the total outstanding shares. It also shows how many assets the company has compared to its liabilities. It is always desirable that the company’s assets should be at least twice its liabilities.  In other words, the ratio of assets to liabilities should be at least 2 or greater than 2. 

One can compute the book value per share by referring to the stock’s annual or quarterly report’s balance sheet. In the balance sheet, one can find the total assets and total liabilities. An easy way to look for the total assets, total liabilities, and outstanding shares is to use Yahoo Finance. For example, let’s say we want to search the balance sheet of NVIDIA, using its last annual report from Yahoo Finance. If we see the balance sheet, the total assets of NVIDIA are approximately 111601 million, and the total liabilities are 32274 million. The total number of outstanding shares is 24477 million. Subtracting the total assets from the total liabilities and dividing it by the total number of shares gives a BVPS of approximately 3.24. 

Now, if we compare the BVPS to the current stock price of NVIDIA, which is as of July 11, 2025, trading at approximately $163. We find that the price to BVPS is around 50. The BVPS of 50 is quite a high value for the value investor. But as we have said when discussing the P/E ratio, NVIDIA has an economic moat in the GPU market and mainly because of the high demand for its server-based GPU. Therefore, such a high BVPS is acceptable to most investors. 

However, for traditional and defensive stocks, this P/B of 50 is obviously a high number. Graham, in his famous book, The Intelligent Investor, recommended that the multiplication of  P/B and P/E should be less than or equal to 22.5. Which means that ideally, the stock P/E should be no more than 15, and its P/B should be less than 1.5. If the multiplication of P/E and P/B is less than 22.5, then the stock is a potential buy. But this is just one criterion for evaluating the stock. Another criterion is the Compound Annual Growth Rate. which we will discuss now. 

Compound Annual Growth Rate

The compound annual growth rate shows the growth rate of the stock from the past periods to the current period. This is also one of the most important factors when evaluating a stock, as you need to know how much growth the stock provides. 

For example, to compute the compound annual growth rate of the stock for the last 10 years, one can take the latest annual EPS and the EPS 10 years ago. Then use the following formula to determine the annual compounding growth rate:

CAGR % = ((Latest Annual EPS/EPS 10 years ago) ^ (1/10) -1)/100

Note that the “^” represents the power to the value. 

For example, the EPS of Ramaco Resource (Ticker Symbol: METC) in 2024 and 2014 was 0.11 and -0.0452, respectively. If we plug that into the formula, we will arrive at the CAGR value of 9.30%.

CAGR % = ((0.11/0.0452)^(1/10) -1)/100 = 9.30%

Thus, over the past 10 years, Ramaco Resource (Ticker Symbol: METC) has grown by about 9.30% which is a standard growth rate. 

Cash Assets per Share

The  Cash Assets Per Share can be determined by subtracting the long-term debt from the cash & cash equivalents, then dividing by the total shares outstanding. 

Free Cash/Share = (Cash & Cash Equivalent – Long Term Debt)/Total Outstanding Shares 

What is Cash per Asset telling you?

Why is it important? The free cash/share determines whether the company has enough cash to cover its long-term debt obligations. Additionally, it will tell you if you are buying a share at a discount.

Taking the example of Ramaco Resource (Ticker Symbol: METC), we found that in the last financial year, cash and cash equivalents were roughly around 33.01 million, while the long-term debt was around 88.19 million. Subtracting the cash equivalent from long-term debt and dividing it by the number of shares outstanding results in a value of -1.0087. That means the Ramaco Resource (Ticker Symbol: METC) has more long-term debt compared to other companies. As of July 1,  the price of Ramaco Resource (Ticker Symbol: METC) is trading at $13.4 per share. That means for each share of  Ramaco Resource (Ticker Symbol: METC), you are paying $1.0087 extra along with $13.4.

Important Note: 

The Ramaco Resource (Ticker Symbol: METC) has recently discovered a rare earth mineral mine that is estimated to be worth around $1.197 billion, which adds approximately $21 to each of its share prices. The fair value of  Ramaco Resource (Ticker Symbol: METC) is around $13/share. An extra $21 with rare earth mineral assets makes it $34 per share. Therefore, at $13, Ramaco Resource (Ticker Symbol: METC) is still trading at a discount of $20 (subtracting the negative value of cash-flow).

Assets-to-liability Ratio

The assets-to-liability ratio is determined by dividing the total assets of the company by the total liabilities.  A good rule of thumb (as per Benjamin Graham) is that the assets should be twice the liabilities. Taking again the example of Ramaco Resource (Ticker Symbol: METC), the total asset-to-liability ratio was 2.16.

Assets-to-Liability Ratio = Total Assets/ Total Liabilities

Assets-to-Liability of METC = 674.69 million/311.88 million = 2.16

The assets-to-liability ratio shows the stability of the company. If the company is in a depressed financial situation, a high value of this ratio shows its potential for recovery in the long or short term. 

Return on Free-Cash-Flow Per Share (% Ret. FCF/Share)

Popularized by Peter Lynch, this ratio determines how much annualized return one can expect on free cash flow. The formula is:

% Ret. FCF/Share = (FCF /Total Shares Outstanding)/Current Stock Price

For example, in 2024, Ramaco Resource (Ticker Symbol: METC) had 43.83 million in FCF per share. The total outstanding shares are  54,703,770 as of July 01, 2025.  This gives us $ 0.80/share of FCF. The current price of Ramaco Resource (Ticker Symbol: METC) is $13.4. That gives us a 16.75-to-0.80 ratio, which translates to 6.10% returns on holding the stock for the long term.

Price-to-Earnings Growth (PEG) Ratio

This ratio was also popularized by Peter Lynch. This ratio is used to determine whether the stock of the company is overvalued or undervalued. The PEG ratio can be determined by dividing the P/E ratio by the CAGR. The PEG ratio of less than 1 is always desirable. Higher than 1 means that the stock is overvalued.

PEG = (P/E)/CAGR 

The EPS of Ramaco Resource (Ticker Symbol: METC) in 2024 was $0.11. The current price of METC is $13.4. This gives the P/E ratio of 119.45. The CAGR of METC over 10 years has been 9.30%. Dividing the P/E by the CAGR gives us the PEG ratio of 12.84. This is way higher than the standard of Peter Lynch.  

Earning Growth to P/E Ratio

This is the opposite of the PEG ratio. Peter Lynch, in his book “One Up on Wall Street”, provides a more definitive range for such a ratio. The range less than 1.5 is bad, greater than 1.5 is ok, and higher than 2 is terrific. 

Graham Number

The Graham Number can also be used to evaluate whether the stock is over-valued or under-valued. The Graham number for a stock can be determined as follows:
Graham Number = sqrt (22.5* EPS*BVPS)
The sqrt stands for square root, EPS is the earnings per share of a stock in the last annual report, and BVPS is the book value per share. 
Considering again the Ramaco Resource (Ticker Symbol: METC) stock, we can see that the Graham number for it is around 16.41. 
METC Graham number = sqrt (22.5 * 0.11 * 6.63) = 16.41

Thus, per Graham’s number, the Ramaco Resource (Ticker Symbol: METC) stock, as of July 1, 2025,  is undervalued by $ 3.01 or around 22.46%.

Market Cap to Net Tangible Assets Ratio

This ratio was preferred for the enterprising investor by Benjamin Graham in his book. To calculate this ratio, one can take the total market cap of the stock and divide it by the net tangible assets. The net tangible assets are the assets obtained by subtracting the total liabilities of the company from its total assets. If the value of this ratio is less than 1.2, the company stock is a preferred buy option.

Conservatively Financed Company

According to Graham, a conservative-financed company is one whose total market capitalization is at least half of its net tangible assets. For the defensive investor, Benjamin Graham preferred the conservatively financed companies. 

Disclaimer

The ratios and the definitions given in this post are for educational purposes and do not render financial advice.