Stock Valuation: 5 Methods to Master Stock Analysis

Understanding stock valuation is key to making smart investment decisions

You guys might have seen the title, Stock Valuation and asked what in the world is that? Well stock valuation includes the steps on how to determine whether a stock is undervalued or overvalued. If it is overvalued then that is a sign that you should not buy it, but if it is undervalued then it is considered a good deal. In this blog I will be teaching you guys the five steps to master stock valuation and how to determine the value of a stock.

5 Methods on Evaluating a Stock

1. PEG Ratio

PEG ratio means price to earnings growth rate. It is used for companies with consistent and steady profit sales. The formula to calculate PEG ratio is the following:

PEG = PE ratio / earnings growth rate

• If PEG is less than 1 then the stock is undervalued
• If PEG is more than 1 than the stock is overvalued

2. Discounted Cash Flow (DCF)

DCF calculates what the future money the company will make is worth today. It is used in companies that have steady, growing cash flow from business activities. You calculate it using this formula:

DCF value = Future cash flow / (1 + discount rate)^n

Where:

• Future cash flow: How much the company makes each year
• Discount rate: A % used to adjust according to risk
• n: How many years in the future

3. Discounted Free Cash Flow (FCF)

A version of DCF that focuses on free cash flow (extra cash after paying for buildings and equipment). Use when cash flow is bigger than profits, or the company spends similar amounts of money on buildings. Used for companies with reliable spending patterns.

The formula used to calculate free cash flow is this: Cash from operations - big spending

Use the same DCF formula but with FCF instead of cash flow

4. Price-to-Sales (P/S) Comparison

Formula: P/S = Price / Sales per share

Compare with:

• Competitors
• Its own past average

5. Price-to-Book (P/B) Ratio

This method compares the stock price to the company’s book value (assets minus debts).

P/B = Market price per share / Book value per share

• P/B less than 1 may indicate undervaluation
• P/B much higher than industry average may indicate overvaluation

Key Takeaways

This lesson teaches us how to find out if a stock is cheap or expensive. We learned simple ways like PEG, DCF, Free Cash Flow, and P/B ratio. Each method works best for a different type of company. The main idea is: only buy a stock if it’s worth more than its price. This helps you make smart and safe investing choices.