- 1). Obtain the current market price of the stock. You can look this up on your preferred investment research site, such as Google, Yahoo! Finance or MSN. Or contact your broker for a quote. Assume the stock price is $20.
- 2). Determine the most recent earnings-per-share figure. You can find earnings per share on the income statement, which can be found in the annual report. Usually companies post their annual report on their website. If not, contact the company's investor relations department and ask it to send you an annual report. Assume the most recent earnings per share for the year is $2.
- 3). Calculate the P/E value. Divide the price of one share by the earnings per share. The answer for this example is $20 divided by two, or 10.
- 4). Calculate the average P/E ratio for other companies in the same industry. Assume the average P/E ratio is 20.
- 5). Calculate the intrinsic value of the business. Since the P/E ratio for the company is lower than the industry average, the company is most likely undervalued in the market. Multiply the earnings per share by the average P/E ratio for the industry to find out how the market would value the company. For this example, the calculation is $2 multiplied by 20, or $40. This is the intrinsic value of the stock.
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