The Definitive Guide: How to Value a Stock - Deepstash

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The Definitive Guide: How to Value a Stock

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What is A Share?

A single share of a company represents a small, but real, ownership stake in a corporation.

One stock's percentage of ownership is determined by dividing it by the total number of shares outstanding.

Stock ownership generally entitles the owner to corporate voting rights and to any di...

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Why Should You Value Shares?

It is important to understand that the stock's intrinsic value is not necessarily directly tied to its current market price.

The efficient market hypothesis, a theory that states that all known information is currently priced into a stock. However, this is not always the case.

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The cornerstone to valuing stocks: The P/E ratio

The go-to metric for nearly all investors when it comes to valuing a stock has to be the P/E ratio. Standing for price-to-earnings, this formula is calculated by dividing the stock price by the earnings per share (EPS). The lower the P/E ratio, the more earnings power investors are buying with ea...

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What's a good P/E ratio to buy a stock at?

Unfortunately, there's no P/E ratio set in stone that makes a stock a buy if it's below, or a sell if it's above.

Often value investors and growth investors will look for different things in a P/E ratio. 

  • Value Investors - the lower the P/E ratio the better.
  • Growth Inves...

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How growth investors can use variations of the P/E ratio

Growth investors often use the P/E ratio as a building block for finding two other metrics: the forward P/E and the PEG ratios.

  • The forward P/E is calculated by dividing the stock price by the company's expected future earnings. 
  • The PEG ratio is calculated by dividing the comp...

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The Price Sales Ratio

While using the P/E ratio as a building block is probably the most popular method to value stocks it is far from the only way. Another common technique to valuing stocks is the price/sales ratio. The P/S ratio is determined by dividing a company's market cap -- the total value of all the companie...

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Price-to-book Ratio

Another metric useful for evaluating some types of stocks is the price-to-book ratio.

How to calculate?

  1. Assets-Liabilities = Book value
  2. Book value/Outstanding shares = Book...

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Final thoughts on valuing a stock

There's more to valuing a stock than just crunching numbers. Investors have to take into careful consideration qualitative factors also, such as a company's economic moat. Moats encompass companies' competitive advantages, such as a network effect, cost advantages, high switching costs, or intang...

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