How to Analyze a Stock’s Fair Values


Understanding a stock's fair value is essential for making informed investment decisions. Fair value represents the intrinsic worth of a stock based on fundamentals, independent of its current market price. Here’s a step-by-step guide to help you analyze whether a stock is undervalued or overvalued.

Advertisement

Start with the Company’s Financials:

  • Income Statement: Focus on revenue growth, profit margins, and net income trends.
  • Balance Sheet: Look at debt levels, assets, and shareholder equity.
  • Cash Flow Statement: Analyze operating cash flow and free cash flow (FCF).
    A consistent rise in revenue and FCF often indicates a financially healthy company.

Use the Discounted Cash Flow (DCF) model to project future free cash flows. Key inputs:

  • Current FCF (from cash flow statement)
  • Expected annual growth rate (5-10% for stable companies)
  • Discount rate (typically 8-10%)
  • Terminal growth rate (1-3%)
    The formula discounts each year's projected FCF to present value and adds a terminal value.
  • Want to calculate future cash flow? FCF calculator.

Determine the Intrinsic Value Per Share:


After calculating the present value of all future cash flows:
  • Add them together
  • Subtract net debt
  • Divide by the number of outstanding shares
    This gives you the intrinsic value per share, which you can compare with the current market price.
  • Want to know fair value or intrinsic value of any stock? Fair value calculator.

Compare with Market Price:

  • If intrinsic value > current price → stock may be undervalued
  • If intrinsic value < current price → stock may be overvalued
  • Want to know stock is undervalue or overvalue?

    Find fair value of any S&P 500 companies.
Advertisement

Advertisement

Advertisement