While purchasing a product, most people are in a dilemma about the value they are paying to buy the product. For example, consider that you have to buy a piece of equipment for your business. Suppose, with the installation of this machinery, you would end up saving $10/day (equaling $3600/mo).
Also, suppose that there are two machines available in the market, one being sold for $5000, while the other being sold at $6200. Now, naturally, there would be numerous questions regarding the comparative aspects of both these machines. Factors like after sales customer support, maintenance costs and the reliability of the machine are considered.
Similarly, while buying a share having an EPA growth of 15% or so, you should evaluate if the price of the stock is worth the bargain or not. You need to see whether the money you are paying is worth the investment or not.
One needs to understand that it is not at all a good practice to buy a stock at any price- the higher the price of the stock, less are the possible future returns. On the contrary buying a stock just because it is cheap, is also not the best approach. Companies offering cheap stocks might have shallow fundamentals.
The right approach therefore, to narrow down your search for the perfect stock, is to follow your instincts about a company you feel is strong. Then, use methods such as ROI, EPS and D/E to counter check your assumptions and ensure that you are, indeed, paying what the stock is actually worth.
As a thumb rule, to get a great deal, you should know the exact value of the stock you intend to purchase. Make a realistic and conservative evaluation to get the best long term gains. It is always better to buy an average stock at a fair price, than buying an excellent, but overpriced stock.
Besides, paying too high for a not-so-good stock should always be avoided. These calculations and considerations therefore, are elementary if you desire to indulge in least risk and still rake in a fair amount as returns on your investment.