How to Check Stock Valuation?: Step by Step Guide

Investors’ sentiment and interest often change with how a stock is valued, but what actually signals a stock’s value zone? After a period of correction, IT stocks witnessed renewed buying as investors saw valuation comfort returning, with prices reflecting most of the downside. 

This renewed confidence shows why checking valuation matters. It helps investors see whether a stock is trading at a fair level and if it offers genuine growth potential or is simply overpriced.

Read further to learn about how to check stock valuation, using P/E, P/B, DCF, and DDM, and how it helps in making investment decisions.

What Does Stock Valuation Mean?

Stock valuation is a process of calculating the intrinsic value of a stock or a company, with a focus on its fundamentals rather than relying on technical charts. It considered factors such as financial health and performance of the company, competitive advantage against competitors, and economic conditions.

Platforms like Stoxo can assist investors in this process by providing real-time research and fundamental analysis to determine the fair value of a stock efficiently.

Why Checking Stock Valuation Matters?

Checking stock valuation matters because it evaluates whether a stock is fairly priced or undervalued, or overvalued.

• Identifies undervalued stocks: The primary goal of checking stock valuation is to identify undervalued stocks that are trading for a lower price than their actual value, which helps investors maximise returns.
• Growth-centric decisions: It helps investors make decisions based on long-term benefits, rather than analysing short-term price fluctuations.
• Proactive risk management: Checking a stock’s intrinsic value helps investors avoid overhyped stocks that could be a result of speculation, therefore, proactively managing risks.

How to Check Stock Valuation?

An investor can check stock valuation by using different valuation metrics, which are discussed below:

Check Valuation Using Ratios (P/E, P/B, PEG, EV/EBITDA)

• The Price-to-earnings (P/E) ratio calculates the amount an investor is willing to pay for every ₹1 a company earns. This ratio is calculated as:

P/E ratio = Share Price/Earnings per share (EPS)

• The Price-to-Book value (P/B) ratio helps determine whether a stock is fairly valued, undervalued, or overvalued based on a company’s book value. Book value is calculated by deducting total liabilities from total assets. It is calculated by comparing the market value of a stock to its book value.

P/B ratio = Market value per share/Book Value

• The Price/Earnings-to-Growth (PEG) ratio is an advanced metric, which is a refined version of the Price-to-Earnings (P/E) ratio that incorporates the growth rate of earnings per share over a period. The calculation for the PEG ratio is as follows:

PEG ratio = (P/E ratio)/Growth Rate of Earnings per share (EPS)

• The EV/EBITDA ratio calculates the total value of a company by dividing its enterprise value (EV) by its Earnings before interest, tax, depreciation, and amortisation (EBITDA).

Enterprise value = Market capitalisation + Total Debt – Cash and cash equivalents

EV/EBITDA = Enterprise Value/EBITDA

Check Intrinsic Value with DCF & DDM

• The Discounted Cash Flow (DCF) method is a widely used method that measures the time value of money. Investors use DCF for making investment decisions, while companies apply it for capital budgeting and cost structuring.

The formula for DCF is:

DCF = CF1/(1+r)^1 + CF2/(1+r)^2 + … + CFn/(1+r)^n

In this formula, CF1 and CF2 represent the cash flow for the years one and two respectively, ‘r’ represents the discount rate, and ‘n’ represents the years.

• The Dividend Discounted Model (DDM) estimates the intrinsic value of a stock by calculating the present value of all expected future dividend payments.

The Gordon Growth Model, also known as the Constant Growth Model, is the most frequently applied DDM method. Its formula is:

P = D₁ / (r-g)

Where:

1. P = intrinsic value
2. D₁ = expected dividend
3. r = rate of return
4. g = growth rate of dividend

Quick Metrics for Retail Investors

Here are some quick metrics for retail investors. In order to make these calculations easier, investors can also use a stock valuation calculator to evaluate whether a stock is trading near its fair value.

• Price to Earnings (P/E) Ratio: It helps retail investors to quickly compare a stock price to competitors’ stock price. 
• Price to Book (P/B) Ratio: It is useful to check whether a stock is trading at a price higher or lower than its actual value, which helps investors find undervalued stocks.
• Dividend Yield: It represents dividend gains compared to the stock price, which is helpful for investors looking for a regular income.

Step-by-Step: How to Check Stock Valuation of a Company

Step 1: Understand the nature of business and industry

First of all, understand the company, its operations, industry, and the economy. It helps to understand the competitive advantage of the company over its competitors and the economic conditions, which may or may not benefit the company.

Step 2: Analyse financial reports

Next, carefully evaluate the financial reports of the company, including its income statement, balance sheet, and cash flow statement. And, observe the revenue growth, cost structure, total assets and liabilities, debt structure, and flow of cash, which reflects the financial health of the company.

Step 3: Calculate and analyse financial ratios

After that, calculate key financial ratios such as P/E, P/B, P/S, and Debt Equity ratio. It helps to compare financial performance over historical periods and against competitors.

Step 4: Select valuation model

For further analysis, select a suitable valuation model, such as DCF or DDM, to calculate the intrinsic value of the stock. DCF calculates the time value of money by calculating the present value of future cash flows, while DDM calculates the intrinsic value by calculating the present value of future dividend payments. 

Step 5: Compare results and make decisions

Finally, compare the intrinsic value of the stock to its market value. If the intrinsic value is greater than the market value, the stock is undervalued and vice versa.

After this, an investor shall be informed enough to make suitable investment decisions.

Common Mistakes When Checking Valuation

• Unrealistic Assumptions: How one perceives data makes a significant impact! Overestimating growth, profits, or market demand often leads to inflated valuations and inappropriate investment decisions.
• Misapplication of Valuation Methods: Using valuation models or enterprise multiples without understanding their applicability can result in inaccurate company or stock valuation.
• Ignoring Broader Risks: Overlooking market conditions, competition, or regulatory changes can even make accurate valuations unreliable for real-world investment decisions.

Tools & Platforms for Checking Stock Valuation

There are tools like Screener that allow fundamental analysis and screening, and help to filter stocks based on P/E ratio or ROE. Moneycontrol, which provides detailed financial data and screening for BSE and NSE-listed companies. And Valuequity.in, which simplifies analysis with Excel sheet models to check valuation. 

Investors can also take help from AI assistants like Stoxo, which is a platform that offers real-time research as well as performs fundamental analysis with natural language commands. It covers all the necessary metrics along with industry and economic analysis.

The official websites of NSE and BSE also offer valuable insights into stock prices. They provide historical data, charts, and market information, which allows investors to check the current value of listed stocks.

Conclusion

Checking stock valuation helps investors identify whether a stock is fairly priced, undervalued, or overvalued. Investors can make informed and long-term investment decisions by using valuation ratios like P/E and P/B, and models such as DCF and DDM, to identify undervalued stocks.

However, investors must stay mindful of wrong assumptions, market risks, and use reliable tools to ensure stock valuation remains accurate, practical, and decision-oriented.

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