Question

How do you go about valuing stock of a company.What if a company has no net income like many tech companies with high valuations?

Answer 1

Valuation of a stock may be described as undervaluation or overvaluation. Undervaluation means stock is available at cheaper rate than other stocks of same sector. Overvaluation means stock is available at much higher rate than compared to other stocks of same sector.

Below are the ways to measure value of a stock:

1) Price to Book Ratio (P/B ratio):

It is calculated by dividing the company's stock price by its book value per share. Book value is total assets minus any liabilities. If P/B ratio is low then the stock is undervalued and vice versa.

2) Price to Earnings Ratio (P/E ratio):

It is calculated by dividing the company's stock price by its earning per share. It helps to determine the relationship between the stock price in the market and its actual earnings. Low P/E ratio indicates that the stock is undervalued and vice versa.

3) Price to Sales Ratio (P/S ratio):

It is calculated by dividing the market capitaliztion by the company's total sales or revenues. Market capitalization is calculated by multiplying total outstanding shares with share price per share in the market. A low P/S ratio indicates that the stock is undervalued and vice versa.