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How to Calculate the Fair Value of Shares for Beginner Investors
How to Calculate the Fair Value of Shares for Beginner Investors

How to Calculate the Fair Value of Shares for Beginner Investors

The basic ability that every stock investor must have is knowing how to calculate the fair price of a stock. By knowing the fair price of a stock, the investor can have an idea of ​​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 too expensive ( overvalued ) or classified as cheap ( undervalued ). Analytical skills are indeed needed to calculate the fair price of shares. Because, there are some  data and ratios that need to be understood. The data can be obtained from the company’s financial statements, market conditions, and the value of the stock itself.

To understand better, let’s examine how to calculate the fair price of a stock in more detail.

What is the Fair Price of Shares?

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 business and financial performance of the company. However, this could be influenced by the market. The company’s stock is valued at a high price because it has the potential to bring 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 the criteria include the number of assets or net worth owned by the company, the amount of debt, and the amount of income earned by the company from year to year. These numbers will determine the company’s valuation of a company.

Misguided Seeing the Fair Price of Shares

Something is considered reasonable if there is an agreement between more than one party. This means that the share price becomes reasonable if it is mutually agreed upon by both the company releasing its shares and the investors who want to buy its shares.

Some stocks can be very expensive. However, this was not agreed upon by the buyer so no one wanted to have it. The company also had to lower the stock 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 their purchasing power.

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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 another. You need to analyze more deeply to determine the fair share price.

Get to know the company more deeply by reading the financial statements and other issues related to the company. You can also see a chart of stock price developments 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 method 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 is reduced by preferred stock. After that, the resulting value must be divided by the number of shares outstanding. The greater the EPS of a company, of course, the better the value of its shares.

From the EPS calculation, you can know the company’s revenue prospects from year to year. For example, company A has a share value with an EPS of $0,1. That is, the value of these shares will generate a profit of $0,1 for each share.

Here’s the calculation formula:

Earning Per Share (EPS) = (Net profit – Preferred dividend) / Number of shares outstanding 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 share price is 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 one, it can be said that the stock is cheap.

For those of you who want to do calculations using the PBV approach, it is better to pay attention to the PBV value for issuers of similar shares. If you find the results are not much different, it can be said that the share price is still within reasonable limits.

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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  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 a share for earnings per share.

The approach to calculating fair share prices with PER must also use industry comparisons. For example, share A must be compared to the industry average PER in the sector A share is in. That way, you can see the PER share price of A is above the industry average.

On the other hand, the PER ratio can also give you information about the prospect of the stock. If the value turns out to be fairly cheap, there’s nothing wrong with paying for shares to own them.

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 the company’s ability to generate profits from the value of its stock investment. This value will also indicate that the company is able to manage additional capital well. It would be even better if the profit generated was more than doubled.

That means you don’t have to worry about buying stocks with a high ROE. The reason is, the benefits that will return to you will also be worth the price.

Here’s 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  Price Earning to Growth Ratio (PEG)

Another step that you can use to measure a fair share price is the PEG method. Price Earning to Growth is the appropriate ratio of stock prices by measuring the value of the profit generated per share as well as the company’s growth expectations. The lower the PEG value, the cheaper the stock value will be.

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Here’s how to calculate stock prices with 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 dividend distribution. The Dividend Yield method looks at the ratio of how much the company distributes dividends to its share price in the market. 

Dividends are the distribution of profits to shareholders. The greater the value of the dividend 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  Debt to Equity Ratio (DER)

You can also calculate the stock price through the amount of debt, you know. A good company certainly has a debt that is smaller 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 do not have debt greater than their capital, yes.

How to calculate share price with DER:

Debt to Equity Ratio (DER) = Total liabilities (debt) : net worth (capital)

That’s a series of ways to calculate the fair share price that you can choose. However, don’t just count, okay? Try to take definite steps by choosing stocks that have the potential to generate cash .