Stock evaluation 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 true financial health of a company.
Do you know why? Because stock price alone never gives you a complete picture.
For example:
It’s possible for two companies to have the same stock price – but one can be strong and healthy while the other is struggling on the inside.
Suppose Company A and Company B are trading at AED 500
Company A earns AED 50 per share with low debt, and Company B earns AED 10 and carries heavy loans.
The price looks the same but stock valuations show that Company A is much stronger compared to Company B.
This is what helps you make the right investment decisions.
If you are learning how to value companies more confidently, this is also the stage that many new investors choose Start trading stocks With Standard Chartered Bank, once they felt ready to apply these principles in the real market.
In this blog, we’ll explain what stock valuations mean and cover key metrics to help you decide if a stock deserves a place in your investment portfolio.
What stock valuation really means
Stock valuation simply means checking whether a company’s shares are priced fairly based on the actual performance of the company.
This includes checking important parameters such as the following:
- Profits
- growth
- Origins
- Future potential
When you evaluate a stock, you will get three results based on which you can decide whether to invest or not. Here’s what’s revealed:
Many investors buy stocks based on price alone, only to later realize that the company was weak on the inside. Evaluation protects you from this mistake. It shows you whether the company is really worth your money.
Valuation of stocks and shares of public and private companies
Valuing stocks and shares is an important part of investing and financial analysis. Stock market evaluation It helps investors determine whether a publicly traded company’s shares are priced fairly based on market conditions. Stock valuation It goes a step further, analyzing the value of an individual stock compared to the overall financial condition of the company.
to understand Fair value shares It ensures that investors know whether a stock is overvalued or undervalued in the market. Stock valuations It involves examining financial metrics, growth potential and market trends to make informed decisions. For private companies, Valuation of private company shares It is necessary because there is no open market price to refer to.
Valuation of private company shares It is often based on revenue multiples, discounted cash flow analysis, or similar company benchmarks. Investors, business owners, and analysts use these valuation techniques to guide investment strategies, mergers, acquisitions, or financing rounds. Accurate valuation helps minimize risks and maximize returns while providing transparency in financial reporting. Public and private valuation methods are vital to understanding a company’s true economic value and potential growth trajectory.
How to calculate company valuation
Below are common stock valuation methods that you can use to verify the actual value of a company. These methods help you understand whether a stock price is fair or misleading.
1. Start with company earnings – EPS + earnings reports
Earnings are the best place to start because they show how well a company is really performing and become the basis for calculating other metrics.
You need to check two things –
- Company earnings reports
- EPS or earnings per share
EPS tells you how much profit a company makes per share. Steady or rising EPS usually means the business is doing well.
This is the EPS formula
EPS = (Net Income – Preferred Dividends) / Common Shares Outstanding at the End of the Period
You can easily check EPS on Yahoo Finance or Google Finance. You can also check it on the Standard Chartered trading app if you are using the platform for investing.
Earnings reports give you a deeper look
- sales
- profit
- Expenses
- religion
- Risks facing the company
As you read, look for red flags such as
- Decreased profits
- Unstable profits
- Seasonal spikes make results look better than they are
example
A company shows rising sales every year, but its profits keep shrinking because costs are rising faster. This is a warning sign.
Earnings per share are important because they become the basis 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 popular 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 pay for every 1 dirham a company earns.
What does high PE mean?
- Investors expect strong growth in the future
- They are willing to pay more today
What does low PE mean?
- Shares may be undervalued
- Or the company may face challenges
example
If earnings rise each year but the P/E ratio remains low, the stock may be a good buying opportunity.
But the P/E ratio is not ideal. Profit can be adjusted in many ways through accounting rules, so one year’s profits may not show the full picture. That’s why it’s better to look at the earnings trend over the past few years rather than rely on a single number.
Also remember these points
- Always compare P/E ratios in the same industry
- Naturally, different sectors have different P/E levels
3. Look at the PS ratio and PB ratio
Price to sales ratio
The price-to-earnings (P/S) ratio helps you judge a company when earnings are unstable or too small to rely on. It shows the amount investors pay for every 1 dirham of a company’s sales.
PS ratio = stock price ÷ sales per share
A low PS could mean that the stock is undervalued.
A high PS may mean that the market is anticipating strong future revenues.
This ratio is useful for early-stage companies and companies with weak profit margins because sales are harder to manipulate than profits.
Price to book ratio
The PB ratio compares a stock’s price to the value of a company’s assets. It helps you know if the stock price is higher or lower than what the company actually has.
PB ratio = stock price ÷ book value per share
This ratio works best for asset-heavy sectors such as banking and real estate.
example
A PB of less than 1 may mean that the stock is cheaper than the value of its assets, which often indicates an undervalued company.
4. Growth assay 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 a growth-adjusted P/E ratio. It shows you whether the stock price is fair in relation to how quickly the company is expected to grow.
P/E ratio = P/E ratio ÷ Earnings growth rate
A PEG of less than 1 could mean that the stock is undervalued relative to its growth. This helps you avoid buying expensive stocks that look hot but have poor growth behind them.
However, the PEG ratio can be unreliable in industries with unstable or unpredictable growth due to the difficulty of estimating future earnings.
5. Debt evaluation 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 is important because too much debt increases risk.
Debt/Equity = Total Liabilities ÷ Total Shareholders’ Equity
A high DE means that the company relies heavily on borrowed money, which can be risky during downturns.
Lower DE is usually safer, but it depends on the industry.
It is normal for some sectors such as banks and utilities to carry more debt due to higher setup costs.
Simple rule
Always compare your D/E ratio with companies in the same industry, not the entire market.
6. EBITDA – Earnings before interest, taxes and amortization
EBITDA is a useful way to check how strong a company’s underlying business is. It shows earnings before interest, taxes, and non-cash expenses such as depreciation.
EBITDA gives you a clearer view of a company’s operating performance and is less affected by capital structure or tax rules.
Ratio of EBITDA to Sales = EBITDA ÷ Net Sales
This ratio will always be less than 1.
Higher EBITDA usually means the company is becoming more efficient.
A declining number could be a sign of stress at work.
7. Use the income approach
The discounted cash flow method, or DCF, estimates a company’s value by forecasting how much cash it may generate in the future. It helps you see what a company can earn in the coming years, not just what it is earning now.
Large investors often use this approach because it focuses on long-term potential.
But DCF has limitations.
It depends largely on assumptions – future growth, costs, interest rates and market conditions. Even a small change in these assumptions can change the final value significantly.
That’s why it’s best to use DCF as a supporting tool.
8. You can also take an 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 find out the true value of a company based on its assets.
What does NAV tell you?
- If the stock price is higher or lower than the real asset value
- How strong the company is in terms of assets
- Whether the business has more resources or more obligations
Where NAV works best for these sectors
- Banks
- Factories
- Real estate companies
- Other asset-heavy sectors
Net asset value is particularly useful when a company has significant tangible assets that are easy to measure and compare to its stock price.
Putting It All Together – A Simple Stock Valuation Checklist
Evaluating stocks helps you avoid risky picks and focus on companies that can really help grow your money. Start by checking earnings and the other important metrics we’ve discussed to build confidence in every decision you make.
