How Do Individuals Determine Whether a Stock Price is too High or too Low?

When attempting to determine whether a stock price is reasonable or not, many people aren't sure what aspects of the stock to consider. Some would argue that EPS (Earnings Per Share) is the single most important variable when determining a share's price, it's the measure of a company's profit. EPS is calculated by taking the net income of a company minus the dividends on preferred stock divided by the average outstanding shares. So, basically, in simpler words, it's the profit a company makes minus the money a company has to pay shareholders, divided by the goal stock a company has issued out.

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The capital required to generate the earnings in the equation is an important part of EPS that is often ignored. Two separate companies can end up with the same EPS, but if one company did so with a significantly less initial investment (less equity), then they would be the "better company" because they were more efficient with their capital,

Clearly EPS is not the only aspect that should be considered though when analyzing the price of a stock, but it is an important one because it includes the three key aspects that are considered when determining the value of a stock (which are income, dividends, and outstanding shares). So, when determining whether the value of a stock is too high or too low, a person should start by calculating said stock's EPS and then move forward into investigating further into the aspects of a stock.


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