{"menuItems":[{"label":"How to value a stock: Technical versus fundamental analysis","anchorName":"#how-to-value-a-stock-technical-versus-fundamental-analysis"},{"label":"How to calculate the value of a stock with fundamental analysis","anchorName":"#how-to-calculate-the-value-of-a-stock-with-fundamental-analysis"},{"label":"Some more tips to help you value a company's shares","anchorName":"#some-more-tips-to-help-you-value-a-company-s-shares"},{"label":"Why should I value shares before buying?","anchorName":"#why-should-i-value-shares-before-buying"},{"label":"Ready to invest? Compare online share trading platforms","anchorName":"#ready-to-invest-compare-online-share-trading-platforms"}]}
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.
That's where fundamental analysis comes in. In this guide, we'll teach you how to value a stock using fundamental analysis and discuss why it's important to do this before spending your hard-earned dollars.
How to value a stock: Technical versus fundamental analysis
There are 2 main ways to value a stock: technical analysis and fundamental analysis.
Technical analysis involves statistical charts and algorithms that analyse share price movements to work out the underlying trend or market sentiment based on the number of people buying and selling the stock.
Fundamental analysis focuses on both the intrinsic and relative value of the shares. 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.
Some investors combine parts of both fundamental and technical analysis into their valuations. However, in this guide, we'll be focusing on fundamental analysis. You can check out the basics of technical analysis for more info on using charting tools.
Let's take a look at a few ways of determining a stock's relative value.
How to calculate the value of a stock with fundamental analysis
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 3 popular ratios used in fundamental analysis.
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.)
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.
* This is a fictional, but realistic, example.
The P/E ratio works best when comparing apples with apples. Most investors would argue that a stock with a lower P/E compared to its peers is "cheaper" and could be undervalued. For example, if you're considering 2 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 its latest report. To calculate the PEG ratio, use the P/E ratio and divide by the growth in earnings per share (EPS).
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 a PEG of 1.
* This is a fictional, but realistic, example.
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). The P/B ratio is: $2/(($80 million – $20 million)/50 million) = 1.7.
* This is a fictional, but realistic, example.
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 that 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 such as Morgans, Bell Potter and Patersons or banks such as Goldman Sachs and JP Morgan release their own reports analysing certain companies. Their analyses 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 of 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 than they need to for something and we all love a bargain. The basic goal of investing in shares is to buy when the price is low and sell when it's high 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.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
If you’re looking for ways to gain exposure to Bitcoin and other digital currencies, cryptocurrency ETFs could be worth exploring. Find out what crypto ETFs are and how they work in this introductory guide.
Looking for alternative investments? With a ROI of up to 3,593% lego may be worth considering. Read on to find out which lego sets are worth the investment.
Equity crowdfunding offers a unique opportunity for investors and for Australian startups, but Australia’s regulatory framework surrounding crowdfunding still lags behind the rest of the world.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Important information about this website
finder.com.au is one of Australia's leading comparison websites. We are committed to our readers and stands by our editorial principles
We try to take an open and transparent approach and provide a broad-based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.
Some product issuers may provide products or offer services through multiple brands, associated companies or different labeling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.
We make money by featuring products on our site. Compensation received from the providers featured on our site can influence which products we write about as well as where and how products appear on our page, but the order or placement of these products does not influence our assessment or opinions of them, nor is it an endorsement or recommendation for them.
Products marked as 'Top Pick', 'Promoted' or 'Advertisement' are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options.
Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment when you click on those buttons or apply for a product. You can learn more about how we make money.
When products are grouped in a table or list, the order in which they are initially sorted may be influenced by a range of factors including price, fees and discounts; commercial partnerships; product features; and brand popularity. We provide tools so you can sort and filter these lists to highlight features that matter to you.
Please note that the information published on our site should not be construed as personal advice and does not consider your personal needs and circumstances. While our site will provide you with factual information and general advice to help you make better decisions, it isn't a substitute for professional advice. You should consider whether the products or services featured on our site are appropriate for your needs. If you're unsure about anything, seek professional advice before you apply for any product or commit to any plan and read any disclosure documents (such as any Target Market Determination (TMD) and/or Product Disclosure Statement (PDS)) issued by the provider before making a decision.
Providing or obtaining an estimated insurance quote through us does not guarantee you can get the insurance. Acceptance by insurance companies is based on things like occupation, health and lifestyle. By providing you with the ability to apply for a credit card or loan, we are not guaranteeing that your application will be approved. Your application for credit products is subject to the Provider's terms and conditions as well as their application and lending criteria.
Please read our website terms of use and privacy policy for more information about our services and our approach to privacy.
