If you often wonder why stock prices rise and fall without any clear reason, it might be time to get familiar with the term fair value, also known as a stock’s intrinsic value.
This isn’t just another technical term in investing. A stock’s fair value helps you understand the real worth of a company, beyond the market’s short-term sentiment or hype.
By knowing a stock’s fair value, you can identify whether it’s undervalued (still relatively cheap with potential upside) or overvalued (too expensive compared to its actual performance).
Read also: What Time Does the US Market Open? Here’s the Guide
1. P/E Method (Price to Earnings Ratio)
This is the most popular and widely used method among both beginner and professional investors.
You only need two key data points: Earnings per Share (EPS) and the average P/E ratio in the same industry.
Formula: Fair Value = EPS × Industry P/E
For example, if a company’s EPS is Rp200 and the industry P/E ratio is 15, then the fair value is Rp3,000 per share. It’s quick and simple, but not ideal for companies reporting losses (negative EPS).
2. PBV Method (Price to Book Value)
If you want to determine whether a stock is overpriced compared to its asset value, the PBV method is a suitable choice.
Simply multiply the book value per share by the average PBV ratio of the industry. If the result is below 1, it means the stock may be undervalued, or trading below its actual worth.
This method is commonly used for sectors such as banking, property, and construction — industries that are asset-heavy.
3. PEG Method (Price/Earnings to Growth Ratio)
If you prefer growth stocks, the PEG method might suit you. The formula divides the P/E ratio by the annual earnings per share (EPS) growth rate.
If the result is below 1, it indicates the stock still has strong potential at a reasonable price. For instance, P/E = 10 and earnings growth = 15%, resulting in a PEG of 0.67 — meaning the stock is still attractive!
4. DCF Method (Discounted Cash Flow)
For deeper analysis, try the DCF method. The concept is to calculate the present value of a company’s future cash flows.
The higher the projected future cash flow and the lower the discount rate, the higher the fair value.
However, this method is quite complex and highly dependent on assumptions such as growth rate and interest rate. Make sure your data and assumptions are realistic.
5. DDM Method (Dividend Discount Model)
This method works best for investors who prefer dividend-paying stocks.
Formula: Fair Value = Dividend per Share ÷ (Cost of Equity – Dividend Growth Rate)
For example, if the dividend is Rp100, the cost of equity is 10%, and the dividend growth is 5%, then the fair value is around Rp2,000 per share.
Read also: MicroStrategy, From Business Intelligence Giant to Bitcoin King
Practical Tips for Calculating Fair Value
- Use the latest financial data, such as EPS, balance sheets, and dividend records.
- Choose the method that fits the company type.
- Compare results from several methods for better accuracy.
- Check the current market price; if it’s below fair value, it might be a good entry opportunity.
- Don’t forget non-financial factors like management quality, industry trends, and macroeconomic conditions.
Conclusion
Calculating a stock’s fair value is like knowing the real price before making a purchase. By applying methods such as P/E, PBV, PEG, DCF, and DDM, you can better determine whether a stock is worth buying now or better left on your watchlist.
If you want to apply these valuation methods to global companies like Apple, Tesla, or NVIDIA, you can easily do it through Tokenized US Stocks on Mobee. With this, you can buy fractional shares of top US companies, starting from a small amount, 24/7, directly from the Mobee app.
%201.png){kind=logo}
