Stock valuation is the first step you take before investing your money in the stock market. It is a proven method that expert investors often use to check the real financial health of a company.
Do you know why? Because the stock price alone never gives you a full picture.
For example:
Two companies can have the same share price – but one can be strong and healthy while the other is struggling on the inside.
Let’s say, Company A and Company B both trade at 500 AED
Company A earns 50 AED per share with low debt and Company B earns 10 AED and carries heavy loans.
The price looks the same but stock valuations show that Company A is far stronger compared to Company B.
And this is what helps you make the right investment decisions.
If you’re learning how to evaluate companies more confidently, this is also the stage where many new investors choose to get started with equities trading with Standard Chartered, once they feel ready to apply these principles in the real market.
In this blog, we will explain what stock valuations means and cover key metrics to help you decide if a stock deserves a place in your portfolio.
What stock valuation really means
Stock valuation simply means checking if a company’s stock is priced fairly based on how the business is actually performing.
This includes checking important parameters like the following:
- Earnings
- Growth
- Assets
- Future potential
When you conduct valuation of a stock, you will get three findings based on which you can decide whether to invest or not. Here’s what it reveals:
Many investors buy shares based on price alone and later realize the company was weak from the inside. Valuation protects you from that mistake. It shows you if the company is truly worth your money.
Stock and Share Valuation for Public and Private Companies
Stock and share valuation is a crucial part of investing and financial analysis. Stock market valuation helps investors determine if a company’s publicly traded shares are priced fairly based on market conditions. Share valuation goes a step further, analyzing an individual share’s worth relative to the company’s overall financial health.
Understanding fair value stock ensures that investors know whether a stock is overvalued or undervalued in the market. Stock evaluations involve examining financial metrics, growth potential, and market trends to make informed decisions. For privately held companies, private company stock valuation is essential because there is no open market price to reference.
Valuation of private company shares often relies on revenue multiples, discounted cash flow analysis, or comparable company benchmarks. Investors, company owners, and analysts use these valuation methods to guide investment strategies, mergers, acquisitions, or funding rounds. Accurate valuation helps reduce risk and maximize returns while providing transparency in financial reporting. Both public and private valuation approaches are vital for understanding a company’s real economic worth and potential growth trajectory.
How to calculate valuation of a company
Here are the common stock valuation methods you can use to check a company’s actual value. These methods help you understand if the stock price is fair or misleading.
1. Start with the company’s earnings – EPS + earnings reports
Earnings are the best place to start because they show how well the company is really performing and it becomes the base for calculating other metrics.
You need to check two things –
- The company’s earnings reports
- EPS or Earnings Per Share
Earnings per share tells you how much profit the company makes for each share. A steady or rising EPS usually means the business is doing well.
Here is the EPS formula
EPS = (Net Income – Preferred Dividends) / End-of-Period Common Shares Outstanding
You can easily check EPS on Yahoo Finance or Google Finance. As a Standard Chartered customer, you can also check it on the Standard Chartered trading app.
Earnings reports give you a deeper look at
- Sales
- Profit
- Expenses
- Debt
- Risks the company is facing
While reading them, look out for red flags like
- Falling earnings
- Unstable profits
- Seasonal spikes that make results look better than they are
Example
A company shows rising sales each year but its profit keeps shrinking because costs are going up faster. This is a warning sign.
EPS is important because it becomes the base for almost every valuation ratio you will use next.
2. P/E ratio or price-to-earnings
The P/E ratio is one of the most common ways to check if a stock is expensive or cheap. It is simply the stock price divided by the company’s earnings per share.
P/E Ratio = Stock Price ÷ Earnings Per Share
In simple words, it shows how much you are paying for every 1 AED the company earns.
What a high PE means?
- Investors expect strong future growth
- They are willing to pay more today
What a low PE means?
- The stock may be undervalued
- Or the company could be facing challenges
Example
If earnings are rising every year but the P/E stays low, the stock may be a good buying opportunity.
But the P/E ratio is not perfect. Profit can be adjusted in many ways through accounting rules, so one year’s earnings may not show the full picture. This is why it is better to look at the earnings trend over the last few years instead of relying on a single number.
Also remember these points
- Always compare P/E within the same industry
- Different sectors naturally have different P/E levels
3. Look at PS ratio and PB ratio
Price to sales ratio
P/S ratio helps you judge a company when profits are unstable or too small to rely on. It shows how much investors are paying for each 1 AED of the company’s sales.
PS Ratio = Stock Price ÷ Sales per Share
A low PS may mean the stock is undervalued.
A high PS may mean the market expects strong future revenue.
This ratio is useful for early-stage companies and businesses with thin profit margins because sales are harder to manipulate than earnings.
Price to book ratio
The PB ratio compares the stock price to the value of the company’s assets. It helps you see if the stock is priced above or below what the company actually owns.
PB Ratio = Stock Price ÷ Book Value per Share
This ratio works best for asset-heavy sectors like banking and real estate.
Example
PB below 1 may mean the stock is cheaper than the value of its assets, which often signals an undervalued company.
4. Growth check using PEG ratio
The PEG ratio is an easy way to check if a stock’s price makes sense when you consider its future growth. Think of it as the P/E ratio adjusted for growth. It shows you if the stock is priced fairly for how fast the company is expected to grow.
PEG Ratio = PE Ratio ÷ Earnings Growth Rate
A PEG below 1 may mean the stock is undervalued for its growth. This helps you avoid buying expensive hype stocks that look popular but have weak growth behind them.
However, the PEG ratio can be unreliable in industries with unpredictable or unstable growth because future earnings are hard to estimate.
5. Evaluate the debt with Debt to equity ratio
The D/E ratio shows how much debt a company uses compared to the money invested by its shareholders. Debt matters because too much of it increases risk.
Debt/Equity = Total Liabilities ÷ Total Shareholders’ Equity
A high DE means the company relies heavily on borrowed money, which can be risky during slowdowns.
A low DE is usually safer, but it depends on the industry.
Some sectors like banks and utilities naturally carry more debt because of high setup costs.
A simple rule
Always compare the D/E ratio with companies in the same industry, not the entire market.
6. EBITDA – Earnings before interest, tax, and amortisation
EBITDA is a helpful way to check how strong a company’s core business really is. It shows the earnings before interest, taxes, and non-cash expenses like depreciation.
EBITDA gives you a cleaner view of the company’s operating performance and is less affected by capital structure or tax rules.
EBITDA-to-Sales Ratio = EBITDA ÷ Net Sales
This ratio will always be less than 1.
A rising EBITDA usually means the company is becoming more efficient.
A falling number can be a sign of pressure in the business.
7. Use the income approach
The Discounted Cash Flow or DCF method estimates a company’s value by predicting how much cash it may generate in the future. It helps you see what the business could earn years ahead, not just what it earns right now.
This approach is often used by large investors because it focuses on long-term potential.
But DCF has a limitation.
It depends heavily on assumptions – future growth, costs, interest rates and market conditions. And even a small change in these assumptions can change the final value a lot.
That is why DCF is best used as a supportive tool.
8. You can also go with asset approach using NAV
The Net Asset Value method checks the value of what a company owns minus what it actually owes. You can use it to see the company’s real value based on its assets.
What NAV tells you?
- If the stock price is above or below real asset value
- How strong the company is in terms of assets
- Whether the business has more resources or more liabilities
Where NAV works best for these sectors
- Banks
- Factories
- Real estate companies
- Other asset-heavy sectors
NAV is especially helpful when a company holds large physical assets that are easier to measure and compare with its stock price.
Putting it all together – Simple checklist for stock valuation
Stock valuation helps you avoid risky picks and focus on companies that can truly help grow your money. Start by checking earnings and other important metrics we have discussed to build confidence in every decision you make.
