How to calculate the value of a stock

Here are a few different ways to work out if a stock is cheap, fairly priced or overvalued compared to its competitors.

We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!

If you’re new to share trading, it can be tricky to decide what to invest in and how to value a stock. You might decide to invest in a major supermarket brand, but how do you choose between similar companies such as Coles and Woolworths? Perhaps you’ve heard friends and colleagues refer to one as “expensive” and the other as a “bargain” but aren’t sure how they’ve determined this.

In this guide we’ll teach you how to value a stock and discuss why it’s important to do this before spending your hard-earned dollars.

Sharesight Portfolio Tracker

Sharesight works alongside your online share trading platform and makes it easy to track your performance and stay organised.

  • Track shares, ETFs, property, currency, and more
  • Comprehensive dividend and tax reporting
  • Free for investors with less than 10 holdings

How to value a stock: Technical versus fundamental analysis

There are two main methods used to value a stock: technical analysis and fundamental analysis.

Technical analysis involves statistical charts and algorithms that analyse the share price movements to work out the underlying trend or market sentiment based on the number of people buying and selling the stock. Some investors combine parts of both strategies into their valuations. However in this guide we’ll be focusing on fundamental analysis only as this is the more practical starting point for new investors.

Fundamental analysis focuses on the intrinsic value of the shares as well as the relative value. Intrinsic value is the “true” value of the shares based on the company's fundamentals, that is, its financial statements including its earnings and debt. Relative value is determined by comparing businesses against their peers, for example, comparing the price of Wesfarmers shares with Woolworths shares, or comparing Westpac shares with CommBank shares. Let’s take a look at a few ways of determining a stock’s relative value.

Three ways to calculate the relative value of a stock

Many investors will use ratios to decide whether a stock represents relative value compared with its peers. There is an endless list of ratios, and they’re most effective when used together to compare similar companies. Here are three popular ratios.

Price-earnings ratio (P/E)

The price-earnings ratio (P/E) looks at a company’s recent or forecasted earnings per share (EPS) against the current market price of its shares. EPS is the portion of the company’s profits (or earnings) allocated back to each individual share. You’ll often see the term P/E with a number that is considered a “multiple” of the company’s earnings, which is a result of the ratio applied.

To figure out a company’s P/E, first look for its EPS figures, which will be readily available in the latest annual or quarterly report on its website. Then simply divide the current price per share by the EPS to find the P/E. (Tip: if the company has adjusted EPS figures, use these instead as they will take into account any one-off major expenses for the reporting period that might affect the EPS figures.)

Calculating the P/E

Let's say company ABC has a current share price of $100 and an EPS of $10 as stated in its latest report. By using this formula, the company’s P/E would be 10.

The P/E ratio works best when comparing apples with apples, and most investors would argue a stock with a lower P/E compared to its peers is “cheaper” and could be undervalued. For example, if you’re considering two similar stocks in the financial industry and one has a P/E of 25 while the other has a P/E of 12, the latter would be considered as better value using this method alone. While there’s no definitive P/E that’s considered “good”, over the last 40 years the All Ordinaries (the oldest index, or tracking tool, of shares in Australia) has averaged a P/E of around 15, which is sometimes seen as a broad threshold for fair value.

Some investors are cautious when a P/E ratio increases substantially as investor expectations about the company’s performance may have jumped ahead of the company’s actual earnings growth. Investors might get caught up in the market hype and anticipate sizeable future growth, but if targets go unmet this could lead to the share price being overvalued.

Price-earnings to growth ratio (PEG)

The price-earnings to growth (PEG) ratio considers a company’s earnings growth. To figure this out you’ll need to find the company’s estimated earnings per share over the next year, which will be included in it’s latest report. To calculate the PEG ratio, use the P/E ratio and divide by the growth in earnings per share (EPS).

Calculating the PEG

Continuing on from our example of company ABC above, let’s say the company has an estimated EPS of $11 over the next year as stated in its report. This is an increase of 10% on its current EPS of $10. Using the PEG formula of the P/E (10) divided by growth in EPS (10%), we have PEG of 1.

Like the P/E ratio, the PEG ratio compares peer performance. Again, there’s no set PEG ratio that is considered a definite “buy” signal, but fundamentalists may treat a stock with a PEG ratio below 1 as undervalued.

Price-book ratio (P/B)

Based on the underlying value of a company’s assets, the price-book (P/B) ratio offers a snapshot of a company’s value according to the book value of the assets on its balance sheet. P/B is calculated by dividing the current share price by the stock’s book value divided by the number of shares issued. The book value is worked out from the balance sheet as total assets minus total liabilities (or costs). The balance sheet with these figures is easy to locate in the company’s latest earnings report on its website.

Consider company XYZ. Its market price is currently $2, with 50 million shares on issue. Total assets are $80 million and total liabilities are $20 million (this equals a book value of $60 million). Therefore, the P/B ratio is: $2 / (($80 million – $20 million)/50 million) = 1.7

The closer the P/B ratio is to 1 (or below), the greater the perceived value of the stock. P/B is mostly used for mature companies with limited growth.

Some more tips to help you value a company’s shares

As well as the above ratios, which give you an idea of a stock’s relative value in line with similar companies, here are a couple more tips to help you work out if a stock is fairly priced or not.

  • Broker recommendations. Major brokers like Morgans, Bell Potter and Patersons or banks like Goldman Sachs and JP Morgan release their own reports analysing certain companies. Within their analysis they’ll include either a buy (or strong buy), sell (or strong sell) or hold recommendation based on where they think the share price is heading.
  • Broker price targets. Within these broker reports they’ll also include a price target for the company's shares. This is the price they believe the shares will reach within the next 12 months, based on their own analysis of the company and the market as a whole.

While relying on these broker reports to determine intrinsic value or investment opportunities could be unwise, these reports may offer a broader picture for a stock’s fundamentals.

It’s important to note that using one of the methods outlined in this guide on its own to determine intrinsic or fair value isn’t a sure-fire way of analysing an investment opportunity. The subjective nature of determining relative value will always lead to a variety of different opinions. Instead you would benefit from a combination of these methods as well as doing your own research into the company before making an investment decision.

Why should I value shares before buying?

No-one wants to pay more for something than they need to, and we all love a bargain. The most basic goal of investing in shares is to buy when the price is low and sell when it's high in order to make a profit.

Valuing a company's shares against similar companies in the market is one of the easiest ways to do this. It can help you work out if you're potentially paying too much for a stock, if you've found a bargain buy or if you're holding onto a potentially overvalued stock in your portfolio that you'd be better off selling and replacing with one of its competitors.

Ready to invest? Compare online share trading platforms

Now that you're equipped with the knowledge you need to compare share prices and stocks, you can find a share trading platform that best suits your needs by comparing brokerage fees, available markets and more.

Name Product Standard brokerage fee Inactivity fee Markets International
Superhero share trading
ASX shares, US shares
Australia’s lowest-cost broker for ASX shares and ETFs.
Pay zero brokerage on US stocks and all ETFs and just $5 (flat fee) to trade Australian shares from your mobile or desktop.
eToro (global stocks)
US$10 per month if there’s been no login for 12 months
Global shares, US shares, ETFs
Zero brokerage share trading on US, Hong Kong and European stocks with trades as low as $50.
Note: This broker offers CFDs which are volatile investment products and most clients lose money trading CFDs with this provider.
Join the world’s biggest social trading network when you trade stocks, commodities and currencies from the one account.
IG Share Trading
$50 per quarter if you make fewer than three trades in that period
ASX shares, Global shares
$0 brokerage for US and global shares plus get an active trader discount of $5 commission on Australian shares.
Enjoy some of the lowest brokerage fees on the market when trading Australian shares, international shares, plus get access to 24-hour customer support.
Saxo Capital Markets (Classic account)
ASX shares, Global shares, Forex, CFDs, Margin trading, Options trading, ETFs
Access 19,000+ stocks on 40+ exchanges worldwide
Low fees for Australian and global share trading, no inactivity fees, low currency conversion fee and optimised for mobile.
ThinkMarkets Share Trading
ASX shares
Limited-time offer: Get 10 free ASX trades ($0 brokerage) when you open a share trading account with ThinkMarkets(T&Cs apply).$8 flat fee brokerage for CHESS Sponsored ASX stocks (HIN ownership), plus free live stock price data on an easy to use mobile app.
HSBC Online Share Trading
ASX shares, mFunds, ETFs, Bonds
Limited time offer: Get up to $100 in brokerage rebates on your first 5 trades when you sign up to a HSBC Online Share Trading account (T&Cs apply). Make trades online with brokerage fees starting from just $19.95 with an HSBC Online Share Trading account. Plus gain access to complimentary expert research, trading ideas and tools.
Bell Direct Share Trading
ASX shares, mFunds, ETFs
Invest in Australian shares, options and managed funds from the one account with no inactivity fee.
Bell Direct offers a one-second placement guarantee on market-to-limit ASX orders or your trade is free, plus enjoy extensive free research reports from top financial experts.
CMC Markets Invest
ASX shares, Global shares, mFunds, ETFs
$0 brokerage on global shares including US, UK and Japan markets.
Trade up to 9,000 products, including shares, ETFs and managed funds, plus access up to 15 major global and Australian stock exchanges.

Compare up to 4 providers

Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage is the cost to purchase $1,000 or less of equities without any qualifications or special eligibility. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

Share your review to win $1,500!

Review your current share trading platform for a chance to win $1,500 in Myer gift cards.

Get started

More guides on Finder

Ask an Expert

You are about to post a question on

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Go to site