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.
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.
