Does P/E ratio helps in determining whether the share of a company is overvalued or undervalued?
3 Answer(s)
Joseph
I believe for this purpose P/E may not help. One may calculate the intrinsic value of the shares using DCF and comparing the same with the market price!
Jan 19 2013 05:19 PM
Binny
Joseph is right. You can compare the DCF share price with the stock market share price to check out how much the difference is. Then you can compare this differential across other companies in the same industry to check if your company is over valued.
But keep in mind the term "over valued" has different meanings to different people. Clearly the shareholders who bought the stock at its current price don't think it is over valued - cause if they did then they wouldn't have bought it. Most investors thought Facebook was overvalued at a $10 billion valuation. But Fb's current market cap is around $60 billion.
Jan 19 2013 08:02 PM
But keep in mind the term "over valued" has different meanings to different people. Clearly the shareholders who bought the stock at its current price don't think it is over valued - cause if they did then they wouldn't have bought it. Most investors thought Facebook was overvalued at a $10 billion valuation. But Fb's current market cap is around $60 billion.
Joseph
Binny, could you please illustrate on this line 'Then you can compare this differential across other companies in the same industry to check if your company is over valued.'
Is it like I see, if the market is over/under pricing every company in the industry uniformly, because the market foresees the sector to have a good/bad future?
Jan 20 2013 08:22 PM
Is it like I see, if the market is over/under pricing every company in the industry uniformly, because the market foresees the sector to have a good/bad future?