A simple question many investing beginners have is how do you value a company? Honestly there’s many different ways this can be done. But, it’s a little more complicated than just looking at the stock price. In this article I will show you how to value a company. You can find more details in Step 4 and Step 5.

# Value a Company with P/E Ratio

The simplest way to value a company with one ratio is the P/E ratio. The P/E ratio of a company is shown on every finance website for stocks, and can be a great way to determine if a company is over or undervalued. P/E stands for price to earnings, and is calculated by dividing price by earnings.

There are a couple ways to do this. First you can take a company’s stock price and divide by their EPS (earnings per share) to find the P/E ratio. The EPS number is also easily found on an financial website such as Yahoo Finance. A P/E below 15 is considered a good ratio.

P/E = [Price] / [EPS]

You can also calculate P/E ratio from the net earnings number. This involves finding out how many shares outstanding there are and calculating the market capitalization of the company. This is **the reason** why you can’t just take a company’s share price and determine from there if it is expensive or cheap. Every stock has a different number of shares, so the total value of a company depends on the market capitalization and not the share price.

The P/E ratio is great, but it doesn’t tell the whole picture of a company. It’s often important to combine this ratio with another, to truly understand the value. The other popular valuation to value a company is the P/B ratio.

# P/B Ratio for a Better Picture

The P/B ratio stands for price to book ratio, and can tell a better picture than P/E ratio in some cases. When both valuations are combined, you determine a much better value for a company. The P/B is much less volatile than P/E ratio, and is therefore more stable. A company with a low P/B has much more assets than liabilities, and is relatively cheap. The lower the P/B ratio, the greater of a discount you are getting to essentially buy this company’s assets.

P/B ratio is calculated by dividing price by book value. Price in this case is referring to market capitalization, and book value is shareholder’s equity (total assets minus total liabilities).

P/B = [share price * shares outstanding] / [total assets – total liabilities]

If you are looking for more insight and analysis on these two ratios be sure to check out Step 4 and Step 5. Or, if you are starting out in investing I recommend starting from Step 1, which is an inspiring post about the great possibilities in investing.

*I hope you enjoyed the information in this post. Please leave a comment if any of my work has helped you in your learning. I wish the best to you all.*

**All Rights Reserved. Investing for Beginners 2013**

**How Do You Value a Company – Wisdom Wednesdays #8**

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