Here are seven widely known formulas for calculating a stock’s fair value (EPS * PER, BPS, EPS * 10, EPS * ROE, Controlling Shareholder’s Net Income * PER / Outstanding Shares, Net Income * PER / Outstanding Shares, and S-RIM). These methods are highly useful for estimating the fair price of a stock.
Fair Price Calculation Formulas
1. EPS * PER
- EPS (Earnings Per Share) represents a company’s net income per share, indicating how much profit is allocated to each outstanding share.
- It is calculated as: EPS=Net IncomeTotal Shares OutstandingEPS = \frac{\text{Net Income}}{\text{Total Shares Outstanding}}EPS=Total Shares OutstandingNet Income
- PER (Price-to-Earnings Ratio) is the ratio of stock price to earnings per share.
- If a company has a PER of 10, it means that its stock price is equivalent to 10 years’ worth of earnings. A lower PER generally indicates a more attractive valuation.
- Formula: Fair Value=EPS×PER\text{Fair Value} = EPS \times PERFair Value=EPS×PER
2. BPS (Book Value Per Share)
- BPS represents the net asset value per share, calculated as: BPS=Total EquityTotal Shares OutstandingBPS = \frac{\text{Total Equity}}{\text{Total Shares Outstanding}}BPS=Total Shares OutstandingTotal Equity
- This method estimates the theoretical fair value of a stock based on its book value.
3. EPS * 10
- This is a simplified method derived from practical experience.
- It suggests that multiplying EPS by 10 provides a rough estimate of a stock’s fair value.
- Formula: Fair Value=EPS×10\text{Fair Value} = EPS \times 10Fair Value=EPS×10
4. EPS * ROE
- This method uses ROE (Return on Equity), which measures a company’s profitability relative to shareholder equity.
- ROE Formula: ROE=Net IncomeShareholder’s Equity×100ROE = \frac{\text{Net Income}}{\text{Shareholder’s Equity}} \times 100ROE=Shareholder’s EquityNet Income×100
- Fair Price Formula: Fair Value=EPS×ROE\text{Fair Value} = EPS \times ROEFair Value=EPS×ROE
- This method, popularized by investor Kim Jung-hwan, emphasizes the importance of multiples when assessing stock value.
5. Controlling Shareholder’s Net Income * PER / Outstanding Shares
- Controlling Shareholder’s Net Income refers to the portion of net income attributed to the majority (controlling) shareholders.
- This method accounts for the consolidated earnings of a company, including its subsidiaries.
- Formula: Fair Value=Controlling Shareholder’s Net Income×PEROutstanding Shares\text{Fair Value} = \frac{\text{Controlling Shareholder’s Net Income} \times PER}{\text{Outstanding Shares}}Fair Value=Outstanding SharesControlling Shareholder’s Net Income×PER
6. Net Income * PER / Outstanding Shares
- This formula is similar to the previous one but uses total Net Income instead of controlling shareholders’ net income.
- Formula: Fair Value=Net Income×PEROutstanding Shares\text{Fair Value} = \frac{\text{Net Income} \times PER}{\text{Outstanding Shares}}Fair Value=Outstanding SharesNet Income×PER
- Typically, the difference between this and the previous formula is not significant.
7. S-RIM (Sustainable Residual Income Model)
- S-RIM Formula: Fair Value=Equity Capital+(Excess Earnings/Discount Rate)Outstanding Shares\text{Fair Value} = \frac{\text{Equity Capital} + (\text{Excess Earnings} / \text{Discount Rate})}{\text{Outstanding Shares}}Fair Value=Outstanding SharesEquity Capital+(Excess Earnings/Discount Rate)
- This method, proposed by accountant Sa Kyung-in, is considered one of the most accurate ways to estimate a stock’s fair value.
- However, it is not included in the provided calculation file.
Final Thoughts
There are various methods for calculating a stock’s fair value, each with its strengths. Investors should analyze past price trends and choose the approach that best suits their investment strategy.
