To successfully invest in the stock market, every trader must know how to evaluate the market price of shares and determine their respective stock values. The accuracy of those stock valuations has to be on point, which isn’t easy given how complicated the calculations can become. On that note, let’s quickly go through some of the pro tips that will help beginners improve the accuracy of their independent stock evaluations.
Find a Resource for the Data You Will Need
Stock value is calculated by comparing the share’s present market price with the company’s contemporary performance and estimated projections for the future. If the current price of a stock is below its stock value, it’s an undervalued stock with high investment potential. In case the stock value is found to be below the current price of a stock, you need to be cautious about investing in the overvalued stock.
As you can imagine, to create the comparative analytics and draw insights from them for proper stock valuation, every trader needs access to data and analytics tools. First of all, you will need a tool for comparing different stocks, their performances, as well as future projections.
Don’t Treat the Different Stock Valuation Numbers as Alternatives
There are primarily four different stock valuation methods or numbers that a trader should be able to utilize. However, you should not be treating them as alternative systems. Instead, treat the following as separate values that must all be taken into consideration (as and when applicable) while determining the final stock value of a company.
- Price-to-Earnings ratio (P/E): Ideal for estimating and comparing the projected future earnings of companies within the same sector.
- Price/Earnings-to-Growth ratio (PEG): Ideal for estimating and comparing the projected future growth of businesses in the same sector.
- Price-to-Book ratio (P/B): Recommended for estimating the actual asset value of a company.
- Free Cash Flow (FCF) number: Recommended for estimating the value of a company, minus all expenses.
Learn How to Calculate the Different Values
Even beginners should know how to calculate the different values mentioned above, since you may often need them to determine the final stock value. Check the simplified explanations next to learn how.
- Find the company’s most recent earnings per share (EPS).
- Find the company’s latest stock price per share.
- Divide the stock price per share by the EPS to get its P/E ratio.
- Find the company’s P/E ratio first.
- Use your most trusted resource to determine the company’s projected growth rate in percentage.
- Divide the company’s P/E ratio by the projected percentage growth rate to get its PEG ratio.
- Find the latest stock price of the company.
- Find the total number of shares issued by the company at that time.
- Find the company’s total book value by subtracting their total liabilities from their total asset value.
- Divide the book value by the number of issued shares to get the company’s book value per share.
- Divide the price per share by the book value per share to get the company’s P/B ratio.
- Find the company’s operating cash flow (OCF).
- Find the company’s capital expenditures.
- Subtract the capital expenditure from the operating cash flow to get the company’s raw FCF number.
Use the free cash flow number to determine the exact profit margin that the company has right now. You will be able to calculate the profit earned from per dollar of revenue generated. Although the profit margin will likely be lower at higher revenue categories, there is no better way to determine the immediate performance and real market value of a stock.