Finding “undervalued” vs “overvalued” stocks is basically asking: Is the price lower or higher than what the company is actually worth?
No one knows 100% but you can get close with these 4 tools. thinks of it like checking the price of a used car vs it’s real condition.
4 quick ways to check value
1. P/E Ratio- Price to Earnings
P/E = Share price / Earnings per share this tells you how much investors pay for 1 rupee of profit.
- Low P/E vs industry: Might be undervalued. Example: Bank stocks in SL often trade at P/E 4-7 vs tech at 20+
- Very high P/E: Market expects huge future growth, or it’s overvalued.
- Catch: A low P/E can mean the company has problems. always compare with similar companies.
2.P/B Ratio- Price to Book
P/E = Share price / Book value per share
Book value= what the company owns minus debts.
- P/B<1: You’re paying less than the company’s net assets. classic “undervalued” signal for banks/old companies.
- P/B >3: You’re paying 3*more than assets. Normal for tech/brands, but risky if growth slows.
3.Dividend Yield
Dividend Yield = Annual Dividend / Share price
If a stable company pays 8% dividend while FD pays 6%, the stock might be undervalued. high yield + failing price = market thinks dividend will get cut.
4.Look at the business, not the numbers
A stock can look “cheap” but be cheap for a reason. Ask:
- Is profit growing or shaking?
- Does it have debt problems?
- Is the industry dying or growing?
this is why Warren Buffett says “buy great business at fair price, not fair business at cheap price”.
