How to Calculate the Value of a Stock of A Company?

 Do you think that the market price of a share is real value of a  stock? If yes, it means you are one out of millions who invest in the share market just seeing the trend and getting overvalued shared. Suppose, you see a company whose market price is 4 times from its past 5 year's price. Now, it looks profitable but stop few minutes and complete your home work. This home work is the analysis of same company. We have great tools of calculating the value of a company.

 P/ E ( Price to earning ratio)

If we divide market price of a share with its earning per share. We find P/E Ratio, it tells if there is same earning every year how many years, we receive our principal amount.

For Example 

A company who's market price is 5 times of its 5 year's ago. Its price is Rs. 1000 and as per profit and loss account, we find that its Earning per share is just Rs. 10 

Now, its P/E is = 1000/10 = 100

You have to wait 100 years to back your Rs. 1000

but today interest rate is 7.25% from bank FD  means within 9.23 years you get back, then why we become greedy to invest in the share market whose price has so over valued. 

Now, as per market, we have ROI Per year = 100%

But if we forget market because market is overconfident through buyers

On ground reality ROI on the basis of company's income statement Per Year = 1%

Today or tomorrow, same share will crash because reality is different from market thinking or believe system and when they understood the above reality, market value will down so fastly. 

Now see the B Company 

who's market price is 3 times of its 5 year's ago. Its price is Rs. Rs. 50 and as per profit and loss account, we find that its Earning per share is just Rs. 10 

Now, its P/E is = 50/10 = 5

You have to wait only 5 years to back your Rs. 50

but today interest rate is 7.25 means within 9.23 years you get back,So, share is under valued and you can invest in it. and better than A company.