How to calculate fair value of any share?
To calculate fair value of the stocks you need to follow 4 steps
Step:- 1
Calculate the P/E ratio.
P/E ratio = current stock price per share/ current earnings per share.
Step:- 2
Compare the P/E ratio for your company with other peer companies. For instance, if you want to find the fair value for IT company, you must compare the P/E ratio to other P/E ratio in IT industry.
Step:- 3
If company has high P/E ratio it means company is overvalued. And if low P/E ratio it means company is undervalued. If I own a company with P/E ratio of 5 when the average P/E ratio for the company in same industry is 3, then I can say my stock is overvalued.
Step:- 4
Adjust the stock price down to the average P/E ratio for the industry. If the average P/E ratio is 3, and the P/E ratio on my stock is 5 ( current price 10rs) / earning per share (2rs) . Then I can use the p/e equation to find what the stock price would need to be in order to have a P/E ratio of 3.
The equation is: New P/E ratio × Earnings per share.
The answer is 3×2 =6rs . The fair market value for this stock is 6rs not 10rs.
To calculate fair value of the stocks you need to follow 4 steps
Step:- 1
Calculate the P/E ratio.
P/E ratio = current stock price per share/ current earnings per share.
Step:- 2
Compare the P/E ratio for your company with other peer companies. For instance, if you want to find the fair value for IT company, you must compare the P/E ratio to other P/E ratio in IT industry.
Step:- 3
If company has high P/E ratio it means company is overvalued. And if low P/E ratio it means company is undervalued. If I own a company with P/E ratio of 5 when the average P/E ratio for the company in same industry is 3, then I can say my stock is overvalued.
Step:- 4
Adjust the stock price down to the average P/E ratio for the industry. If the average P/E ratio is 3, and the P/E ratio on my stock is 5 ( current price 10rs) / earning per share (2rs) . Then I can use the p/e equation to find what the stock price would need to be in order to have a P/E ratio of 3.
The equation is: New P/E ratio × Earnings per share.
The answer is 3×2 =6rs . The fair market value for this stock is 6rs not 10rs.
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