How to Calculate the Fair Price of Shares that Beginner Investors Need to Know
The basic ability that every stock investor must have is knowing how to calculate the fair price of shares. By knowing the fair price of a stock, the investor can have an idea whether the stock price is expensive or still cheap. That way he can make the right decision whether to buy, sell, keep it.
Knowing the fair price of shares is also part of the analysis to assess whether an issuer is overvalued or undervalued. Analytical skills are necessary to calculate the fair price of shares. Because, there are some data and ratios that need to be understood. These data can be obtained from the company's financial statements, market conditions, and the value of the shares themselves. To understand better, let's check how to calculate the fair price of shares in more depth.
What is Fair Share Price?
The fair price of shares is the price of shares at a certain point which is considered comparable to the company's fundamentals. Of course this refers to the company's business and financial performance. However, this could be influenced by the market. The price of the company's shares is considered high because it has the potential to generate profits. To find out whether the company is healthy and can bring profits in the future, there are several criteria that are usually considered by an investor to buy a stock. Some of these criteria include the amount of assets or net worth owned by the company, the amount of debt, and the amount of income the company earns from year to year. Those numbers will determine the valuation of a company's company.
Misguided Seeing the Fair Price of Shares
Something is considered reasonable if there is an agreement between more than one party. That is, the share price becomes reasonable if it is mutually agreed upon by both the company releasing its shares and investors wishing to buy their shares. Some stocks can be very expensive. However, this was not agreed upon by the buyer so that no one wanted to own it. The company also had to lower the share price in order to attract investors to buy it. As mentioned earlier, this fair price must be seen from the fundamental side. Beginner stock investors sometimes consider high stock prices to be unreasonable. They only see from the point of view of purchasing power they have. Comparing two stocks in the same sector and having similar products may have different stock prices. However, you should not immediately judge that one stock is more expensive than other stocks. You need to analyze more deeply to determine the fair share price. Get to know the company more deeply by reading financial reports and other issues related to the company. You can also see a graph of the development of stock prices in recent times. Only then can you judge whether the stock price is expensive or cheap.
How to Calculate the Fair Price of Shares
There are several methods that can be used to calculate the fair share price. Here's a way or method that you can use:
1. Calculating the fair price of shares with Earning per Share (EPS)
Earning per share is the company's net income earned for one year and deducted by preferred shares. After that, the resulting value must be divided by the number of outstanding shares.
The bigger the EPS of a company, of course, the better the value of its shares.
From the EPS calculation, you can find out the company's revenue prospects from year to year. For example, company A has a share value with EPS of IDR 500. This means that the value of the shares will generate a profit of IDR 500 for each share. Here's the calculation formula:
Earning Per Share (EPS) = (Net profit – Preferred dividend) / Number of outstanding shares at the end of the period
2. Calculating the fair price of shares with Price to Book Value
Another way that you can use to calculate a fair stock price is the Price to Book Value (PBV). This method will compare the stock price with the book value or asset value in the company's books. Generally, the price of an issuer is said to be expensive if the resulting PBV value is more than 1. If the value is less than 1, it can be said that the stock is cheap. For those of you who want to do calculations using the PBV approach, it's a good idea to pay attention to the PBV value of issuers of similar stocks. If you find the results are not much different, it can be said that the share price is still within reasonable limits.
The following is the formula for calculating stock prices with PBV:
Price to Book Value (PBV) = Share price / Book value per share
3. Calculating the fair price of shares with the Price to Earning Ratio
Price to Earning Ratio (PER) is a comparison of stock prices with earnings per share or earnings per share. This ratio shows the willingness of investors to pay for a share for earnings per share. Approach to calculating the fair share price with PER must also use industry comparisons. For example, stock A should be compared to the average PER of the industry in which stock A is located. That way, you can see the price PER of share A is above the industry average. On the other hand, the PER ratio can also give you information about the prospect of these shares. If indeed the value turns out to be fairly cheap, there's nothing wrong with paying for shares to own it. The formula for calculating stock prices with PER:
Price to Earning Ratio (PER) = Share price / earnings per share (EPS)
4. Calculating the fair price of shares with Return on Equity (ROE)
ROE serves to measure a company's ability to generate profits from the investment value of its shares. This value will also indicate that the company is able to manage additional capital well. Even better if the profit generated is more than doubled. This means you don't need to worry about buying stocks with high ROE. The reason is, the profits that will return to you will also be commensurate with the price.
The following is the ROE formula for calculating stock prices:
Return On Equity (ERO) = Net profit after tax / Total equity
5. Calculating the fair price of shares with the Price Earning to Growth Ratio (PEG)
Another step that you can use to measure a fair stock price is the PEG method. Price Earning to Growth is the appropriate ratio of stock prices by measuring the value of profit generated per share as well as the company's growth expectations. The lower the PEG value, the cheaper the stock value. Here's how to calculate stock prices using the PEG approach:
Price Earning to Growth Ratio = PER / Growth ration / 100
6. Calculating the fair price of shares with Dividend Yield (DY)
There is another way to calculate the fairness of the stock price by looking at the distribution of dividends. The Dividend Yield method looks at the ratio of how much the company distributes dividends to its share price in the market. Dividends are distribution of profits to shareholders. The greater the value of dividends per share, it can be assumed that the company is doing well. You are certainly advised to choose stocks with large dividend distribution values. Here's how to calculate stock prices with Dividend Yield:
Dividend Yield (DY) = Dividend per share : share price
7. Calculating the fair price of shares with the Debt to Equity Ratio (DER)
You can also calculate the stock price through the amount of debt, you know. A good company certainly has less debt than its net capital. When the DER value is greater, it can be assumed that the company has a large financial risk as well. Make sure to only choose companies that don't have more debt than their capital, OK.
How to calculate stock prices with DER:
Debt to Equity Ratio (DER) = Total liabilities (debt): net worth (capital)
That's a series of ways to calculate fair stock prices that you can choose from. However, don't just count, OK? Try to take definite steps by choosing stocks that have the potential to generate profit.