📚 Introduction to Stock Valuation
Stock analysis can seem overwhelming, but it boils down to answering one question: "Is this stock worth the current price?"
This guide will teach you the essential metrics and ratios used by professional investors to make informed decisions. Let's start with the basics and build up to advanced techniques.
💰 1. P/E Ratio (Price-to-Earnings)
P/E = Stock Price ÷ Earnings Per Share
What It Means:
The P/E ratio tells you how many years of earnings you're paying for when you buy the stock. If a stock has a P/E of 20, you're paying $20 for every $1 of annual earnings.
How to Interpret:
- Low P/E (5-15): Potentially undervalued or slow-growing company
- Medium P/E (15-25): Fair value for most established companies
- High P/E (25+): High growth expectations or potentially overvalued
⚠️ Limitation: P/E doesn't consider growth rate. A high-growth tech stock with P/E of 30 might be a better value than a slow utility with P/E of 15!
🎯 2. PEG Ratio (Price/Earnings-to-Growth)
PEG = P/E Ratio ÷ Earnings Growth Rate
What It Means:
PEG adjusts the P/E ratio for growth, giving you a fairer comparison between companies with different growth rates.
How to Interpret:
- PEG < 1.0: Potentially undervalued (buying growth at a discount!)
- PEG = 1.0: Fairly valued (Peter Lynch's "fair value")
- PEG > 1.0: Potentially overvalued (paying a premium for growth)
✅ Advantage: PEG is one of the best single metrics for growth stocks. It levels the playing field between different industries.
💎 3. PEGY Ratio (PEG + Yield)
PEGY = P/E ÷ (Growth Rate + Dividend Yield)
What It Means:
PEGY is the ultimate valuation metric for dividend stocks. It considers both growth AND dividend yield, giving you the complete picture of total returns.
When to Use:
- Dividend-paying stocks (obviously!)
- REITs and utilities
- Mature blue-chip companies
- Income-focused investing
💡 Pro Tip: A stock with 10% growth + 4% dividend yield (14% total) at P/E of 18 has PEGY of 1.29 — much better than the PEG of 1.8!
📊 4. Other Essential Metrics
Market Cap 🏢
Formula: Share Price × Total Shares Outstanding
Why it matters: Shows company size. Large-cap ($10B+) = stable, small-cap ($300M-$2B) = higher growth potential but riskier.
Dividend Yield 💵
Formula: Annual Dividend Per Share ÷ Stock Price × 100
Why it matters: Shows income return. 3-5% is typical for good dividend stocks. Above 7% may indicate risk of dividend cut.
EPS Growth Rate 📈
What it is: Annual rate of earnings per share increase
Why it matters: Core input for PEG/PEGY. 15-20% growth is excellent. Above 30% may be unsustainable.
Debt-to-Equity Ratio ⚖️
Formula: Total Debt ÷ Shareholder Equity
Why it matters: Shows financial risk. Below 0.5 = conservative, above 2.0 = high debt risk (industry-dependent).
Return on Equity (ROE) 🎯
Formula: Net Income ÷ Shareholder Equity × 100
Why it matters: Shows how efficiently company uses shareholder money. Above 15% is good, above 20% is excellent.
🔍 5. Step-by-Step Stock Analysis
- 1
Understand the Business
What does the company do? How does it make money? Is it a leader in its industry?
- 2
Check the Financials
Look at revenue growth, profit margins, and debt levels over the past 3-5 years.
- 3
Calculate Valuation Metrics
Use our calculator to get P/E, PEG, and PEGY. Compare to industry averages and competitors.
- 4
Assess Growth Potential
Is the growth rate sustainable? What's the company's competitive advantage? Any threats?
- 5
Consider Dividends
For income investors: Is the dividend safe? Check payout ratio (<60% is healthy) and dividend history.
- 6
Make Your Decision
If PEG/PEGY < 1.0, solid business, and manageable debt → likely a good value. Otherwise, keep researching!
❌ Common Beginner Mistakes
1. Relying on One Metric
Don't buy a stock just because it has low P/E. Use multiple metrics and understand the business!
2. Ignoring Industry Context
Tech stocks naturally have higher P/E ratios than utilities. Compare companies within the same sector.
3. Using Unrealistic Growth Rates
Be conservative with growth estimates. If 50% growth seems too good to be true, it probably is.
4. Chasing Dividend Yields
Very high yields (7%+) often signal trouble. Check if the company can afford to maintain the dividend.
5. Forgetting About Debt
A company with attractive ratios but crushing debt is still risky. Always check the balance sheet.
⚡ Quick Decision Framework
Is This Stock a Good Value?
PEG or PEGY < 1.0
Revenue growing consistently
Debt-to-Equity < 1.0
Strong competitive position
Industry you understand
If most boxes are checked → Strong candidate for further research! 🎯
📚 Additional Resources
How to Use PEG Ratio
Deep dive into PEG calculation and interpretation
Understanding PEGY
Complete guide to PEGY for dividend stocks
SEC EDGAR Database
Official company filings and financial statements
Company Investor Relations
Annual reports, earnings calls, and presentations
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