It is likely that if someone asks you to find the stock value of a company, you would look up its share price and offer that as the answer. And that’s not wrong since the price of any stock shows its value in the market.
However, if you have read stock valuation books or come across financial advice in some of the best stock advisor websites in the past, you would know that there is more to company stock values than its share price. That’s because company stocks also have intrinsic values, which are not always subject to market fluctuations that arise from public perceptions.
So, if you would like to invest in any business, it would be best to learn other valuation metrics for stocks and use them to understand the value of company stock. These include:
- Dividend yields
- Price-to-book ratios
- Earnings per share
- Price-to-earnings ratios
- Price earnings-to-growth ratios
Learning such metrics can enable you to predict the company’s future stock price in the market. And based on whether the stock is overvalued or undervalued, you can determine what kind of return you could get.
1. Dividend Yield
Dividend yield refers to the annual dividend payments a company gives for each share you hold relative to its share price. This value is expressed in the form of a percentage. And you can use it to compare different companies and determine which ones will offer you the best dividends per dollar you invest.
So, you can find the stock value concerning dividend yields by using the formula:
Dividend Yield = Annual Dividend Yield per Share/Price per Share
You can obtain information about annual dividends for different stocks from their annual report and compare it to the current market price of the company stock. The latter is available on financial websites, such as the Wall Street Journal.
For example, suppose company ABC with a current share price of $20 paid out $2.50 as annual dividends per share. In that case, the dividend yield for the company will be 12.5 percent.
2. Price-to-Book Ratio (P/B Ratio)
The price-to-book ratio (P/B ratio) refers to the current market value of a company stock relative to its book value. It is also known as the market-to-book ratio or price-to-equity ratio. And it offers a look into how financially healthy a company is.
You can determine the current market value of a company by multiplying its current stock price by the total number of outstanding shares. On the other hand, a company’s book value is the sum of the value of all its assets minus liabilities.
And all the information you need for the P/B ratio is usually available in the company balance sheet. But it would be best to use the current closing share price and the latest quarterly company book value.
So, the formula to find the stock value, in this case, would be:
P/B Ratio = Market Capitalization/ Net Book Value
P/B = Market Price per Share/Book Value per Share
P/B ratios below one indicate the company stock is undervalued or its performance is poor. Those with ratios of one show the company is fairly valued. And anything with a P/B ratio of over one indicates the stock is overvalued compared to its assets.
3. Earnings Per Share (EPS)
Earnings per share (EPS) refer to the company’s net profits compared to the outstanding shares of common stock. You can use it to determine how profitable a company stock is. It shows how much money each share of stock would get if all of the company profits were distributed to the outstanding common shares annually.
Generally, EPS values indicate the company is making more money for its common shareholders. And because it is difficult to determine how many outstanding shares there have been over the year, you use the average value.
Therefore, to find stock value in this case:
EPS = (Net Income-Preferred Dividends)/ Average Outstanding Common Shares
EPS is usually expressed in dollars.
4. Price-to-Earnings Ratio (P/E Ratio)
The price-to-earnings (P/E) ratio refers to the company stock market price compared to how much it earns per share. It is sometimes known as earnings multiple. And, you can think of it as the price you need to pay for each dollar of the current earnings of a company.
You can use the P/E ratio to determine the worth of a company stock you want to invest in or already own shares of compared to its historical performance or similar companies within the industry.
A high P/E ratio indicates the stock is either overvalued or is in high demand because investors expect the company to perform well and grow. Non-performing companies have no P/E ratio since the denominator will have no valid value. But poorly performing companies or those whose stocks are undervalued will have a lower P/E.
To find the stock value in this case, you can use the formula:
P/E Ratio = Stock Price (per share)/Earnings Per Share (EPS)
P/E = Market Capitalization/Total Net Earnings
For example, if a company has a stock price of $60 and EPS of $3, its P/E ratio is $60/$3, which equals 20.
5. Price Earnings-to-Growth Ratio (PEG Ratio)
PEG ratio refers to a company stock’s price-to-earnings ratio relative to its earnings growth rate over a specified time. The latter is usually expressed in the form of a percentage.
To calculate the stock value in this case,
PEG Ratio = (P/E Ratio)/Earnings Growth Rate
PEG= (Share Price/EPS)/EPS Growth Rate
For example, suppose a company XYZ has a P/E ratio of 15 and an annual growth rate of 25 percent. In that case, its PEG ratio will be 15/25, which equals 0.6.
Generally, a PEG ratio of one or more indicates a company stock is overvalued. On the other hand, a ratio of one or less shows the company stock is undervalued or fairly priced or undervalued.
It would be wise to explore different aspects of a company’s stock value instead of concentrating on its market price only. And keep in mind the various ratios to determine whether a stock is overvalued or undervalued. That way, you can obtain a more comprehensive view of its worth before making significant financial decisions.
I have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.