How to Determine Stock Value

Choose a stock to analyze. Most online and newspaper stock quotes list both earnings per share (EPS) and P/E. Earnings are the latest quarter's net profit figures. Net profit is calculated by subtracting expenses from revenues. Earnings per share is figured by dividing total net earnings by the number of shares of that stock that are issued and outstanding.
Calculate the price/earnings ratio by dividing a company's earnings per share into the price you would pay to buy one share of its stock. If your stock quote contains P/E, use that price/earnings ratio rather than figure your own. Find industry average P/Es on Yahoo! Finance by getting a quote on a stock in your target industry and then clicking on the 'competitors' link in the left navigation bar. The link will take you to statistics of major competitors of the company you quoted and to statistics for the industry as a whole.
Compare the price/earnings ratio to those of other companies in that industry. When the marketplace is excited about a new industry, as it was by computers in 2000, the P/Es will be high. Computer industry P/Es at that time were averaging 49 times earnings (49x), while railroads traded at 16x, banking at 13x and airlines at 10x. Yahoo! Finance lists average P/Es as of November 2009 for the computer industry at 32x, railroads at 16x, banking at 18x, and airlines at 38x. Within each industry sector, prominent companies will trade higher or lower than their industry average, depending on their outlook.
Try other methods of determining the real value of a stock relative to its price. These involve analyzing that company's financial reports. You can determine whether a company is selling below its cash value by adding its cash and equivalents plus its short-term investments and then dividing by the number of shares outstanding. This will give you cash per share, which occasionally exceeds the price of the stock. Such stocks are considered bargains by value investors, who will buy them in the expectation that they will trade up in price as other investors discover them.
Use the ratio of stock price to book value to determine the value of a stock using the company's financial reports. Take shareholders' equity and divide that by the number of shares outstanding and you will have book value per share. Find the price-to-book-ratio by then dividing the offered price of the stock by the book value per share. The lower this number, the greater the value of the stock at that price. Use this in comparing companies within an industry to determine which is selling at a better price relative to value.
Calculate the return on equity (ROI) by taking total shareholders' equity and dividing it by the company's annual earnings. The larger the number, the better the ROI.

How to Calculate Fair Value for a Stock

Calculate the P/E ratio. The formula used to calculate the P/E ratio is 'current stock price per share' / ' current earnings per share.'
Compare the P/E ratio for your company with other companies in the same industry. For instance, if you want to find the fair value for a bank, you must compare the P/E ratio to other P/E ratios in the banking industry.
Interpret the meaning of the P/E ratio. A high P/E ratio means the company is overvalued and a low P/E ratio means the company is undervalued. For instance, if I own a company with a P/E ratio of 5 when the average P/E ratio for companies in the same industry is 3, I know that my stock is overvalued (expensive).
Adjust the stock price down to the average P/E ratio for the industry. If the average P/E ratio is 3, and the P/E ratio on my stock is 5 (current price $10 / earnings per share $2), then I can use the P/E equation to find what the stock price would need to be in order to have a P/E ratio of 3. The equation is: New P/E ratio x Earnings per share. The answer is 3 x $2 or $6. The fair market value for this stock is $6, not $10.