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Stock Price Formula:
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The stock price formula calculates the theoretical value of a stock based on its earnings per share (EPS) and price-to-earnings (P/E) ratio. This fundamental valuation model helps investors determine if a stock is fairly valued in the market.
The calculator uses the stock price formula:
Where:
Explanation: The formula multiplies the company's earnings per share by its P/E ratio to determine the fair market value of the stock.
Details: Accurate stock valuation is crucial for investment decisions, portfolio management, and identifying potential investment opportunities. It helps investors determine whether a stock is overvalued, undervalued, or fairly priced relative to its earnings potential.
Tips: Enter EPS in currency per share and P/E ratio as a unitless number. Both values must be positive numbers greater than zero for accurate calculation.
Q1: What is EPS and how is it calculated?
A: EPS (Earnings Per Share) is calculated by dividing a company's net income by the number of outstanding shares. It represents the portion of a company's profit allocated to each share of stock.
Q2: What does P/E ratio indicate?
A: The P/E ratio shows how much investors are willing to pay per dollar of earnings. A higher P/E may indicate growth expectations, while a lower P/E may suggest undervaluation or poor prospects.
Q3: What are typical P/E ratio ranges?
A: P/E ratios vary by industry, but generally range from 10-25 for mature companies. Growth companies may have higher P/Es (30+), while value stocks often have lower P/Es.
Q4: Are there limitations to this valuation method?
A: Yes, this method doesn't account for future growth, debt levels, industry trends, or macroeconomic factors. It should be used alongside other valuation methods.
Q5: Should this formula be used for all types of stocks?
A: This formula works best for profitable, established companies. For growth stocks, startups, or companies with negative earnings, alternative valuation methods may be more appropriate.