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Investment strategy uncovered: How to pay the best price for a quality business

by , 08 July 2015

When investing in shares, the quality of a business is of the utmost importance.

But finding the right stock to buy isn't the only thing you need to do. You need to buy shares at the right price.

So how can you work out what you should be paying for shares in a quality company?

Read on to find out…

Investing at the right price is crucial

The price you pay for a stock has a big impact on your future potential profits. The less you pay, the greater the scope you have for making money.

Once you’ve found a great quality business to buy into, value a company looking at its earnings before interest, taxes, depreciation and amortisation or EBITDA.

Don’t use this method for low quality companies, Porter Stansberry in Daily Wealth explains. But with high quality businesses, this method works really well.

By looking at EBITDA, it gives you an easy way to compare companies in different industries.

How to buy shares at the right price

To stop you paying too much for shares in a great company, don’t pay more than ten years’ worth of EBITDA per share.

To calculate this compare the EBITDA against the enterprise value of the company. The enterprise value is the value of all the shares and debt a company has minus any cash.

This gives you the share price multiple…

Share price multiple = Enterprise value / EBITDA

You want the share price multiple to be less than ten.

Bear in mind that you should be prepared to pay slightly more for a great business that is growing.

So there you have it. How to pay the best price for a quality business.

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Investment strategy uncovered: How to pay the best price for a quality business
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