Price-earnings ratio (P/E)
A high P/E ratio could mean the stocks are overvalued. Therefore, it could be useful to compare competitor companies' P/E ratios to find out if the stocks you're looking to trade are overvalued. P/E ratio is calculated by dividing the market value per share by the earnings per share (EPS).
Share Price ÷ Earnings Per Share = P/E Ratio
You generally use the P/E ratio by comparing it to other P/E ratios of companies in the same industry or to past P/E ratios of the same company. If you compare same-sector companies, the one with the lower P/E may be undervalued.
The idea is that when the market cap is higher than GDP, the stock market is overvalued. If the market cap is below the GDP, the stock market is undervalued. As you can see from the chart, the two times the market cap was above the GDP was just before the Tech Bubble and before the financial crisis.
Price-to-sales ratio (P/S).
The price-to-sales ratio can be used when a stock's P/E ratio can't be measured. This ratio represents the current stock price divided by the sales per share. The higher the ratio, the more likely it may be that a stock is overvalued.
Price-to-book ratio (P/B)
To calculate it, divide the market price per share by the book value per share. A stock could be undervalued if the P/B ratio is lower than 1.
Investors and analysts consider stocks which have a P/E ratio of 50 or above to be an overvalued share, especially in comparison to a stock which has a ratio at par with or below 10.
Fair Value Estimate for Apple
With its 2-star rating, we believe Apple's stock is overvalued compared with our long-term fair value estimate of $200 per share, which implies a fiscal 2025 adjusted price/earnings multiple of 27 times, an enterprise value/sales multiple of 7 times, and a free cash flow yield of 4%.
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio.
A beta coefficient of less than 1 means that a stock tends to be less volatile than the overall market. Utility and real estate stocks are two examples of industries that typically have low betas. A beta coefficient of more than 1 means that a stock tends to be more volatile than the overall market.
A negative P/E ratio suggests the company is currently unprofitable, as it has more expenses than revenue. It often means the company made no money over the last 12 months.
He determines this value by estimating the future cash flows of the company and discounting them back to their present value. To decide whether a company is undervalued and worth investing in, Buffett requires a margin of safety in the purchase price, typically more than 30%.
The concept of value investing, developed by Benjamin Graham and popularized by Warren Buffett, essentially means investing in shares that are undervalued by the market. When a stock's share price is well below its intrinsic value, that can be a bargain buy for investors.
The intrinsic value of one MSFT stock under the Base Case scenario is 317.76 USD. Compared to the current market price of 418.95 USD, Microsoft Corp is Overvalued by 24%.
One of the quickest ways to gauge whether a stock is undervalued is to compare its valuation ratios to the rest of its industry or the overall market. If the ratios are below that of the industry average or a broad market index such as the S&P 500, you may have a bargain on your hands.
The intrinsic value of one TSLA stock under the Base Case scenario is 57.58 USD. Compared to the current market price of 388.23 USD, Tesla Inc is Overvalued by 85%.
A high P/E ratio may indicate overvaluation, as it suggests that investors are willing to pay a premium for each dollar of earnings generated. Comparing a company's P/E ratio to its historical average or industry peers can provide insights into whether the stock is trading at a higher valuation.
The stock's forward price-to-earnings (P/E) ratio climbed more than 35% during the year to 29. Investors were willing to pay a larger premium relative to short-term results. That indicates more optimism about Apple's prospects and higher investor risk tolerance overall.
Lower P/E Ratios can sometimes be a sign that a stock is undervalued relative to its earnings. A better way to tell if a stock has a good P/E Ratio is to compare it against industry averages and growth expectations. Average P/E Ratios generally range from 20 to 25.