Peer Analysis :
One of the most common methods of financial analysis include Peer Analysis. It is basically used by the investors to compare the stocks and this helps them in identifying the good candidates among the peers in a group. Peer analysis is very useful in identifying the overvalued and undervalued stocks within the same sector and industry.
To better understand how peer analysis is done, let’s take an example from a snapshot attached below;
Now, from the above snapshot, we can see the details about market cap, current price, earnings per share, price earnings ratio, Price book value ratio, price to sales ratio and the dividend yield.
Market cap refers to the total value of all the shares of stock of a company. If you multiply the price of a stock by the total number of the shares outstanding you get the market cap for the company. If the market cap is too high then the stock might be overvalued and it might be undervalued if the market cap for that company is too low.
EPS or Earnings Per Share is the monetary value of the earnings per outstanding share of a company’s common stock. If the EPS is too high then the stock might be overvalued and if it's too low then it might be undervalued. If the EPS is high then the investors will have to pay a higher price expecting a better return.
To learn more about EPS, go to EPS Article
Price Earnings ratio or P/E ratio is the ratio of the share price of a company to the earnings per share of the company. It is basically used in valuing the companies as overvalued or undervalued. Companies with a low P/E ratio have the stocks that are undervalued because their stock price trades lower relative to its fundamentals. The mispricing turns out to be a great bargain since it will prompt investors to buy the stock even before the market has corrected it.
To learn more about P/E, go to P/E Ratio Article
It is the market’s valuation of a company relative to the book value. The investors use the P/B ratio to identify the potential investments. P/B ratios which are considered to be the solid investments are usually under 1. A company with a high P/B ratio has the stock that might be overvalued while the lower P/B ratio could mean the undervaluation of its stock.
To learn more about P/B, go to P/B Ratio Article
The Price Sales Ratio is basically an investment valuation ratio. It is calculated by dividing a company's market capitalization by the company’s sales for the last year. It measures the value that the investors receive from a company’s stock. A higher than average P/S ratio could mean that the stocks are overvalued while a lower than average ratio might indicate undervaluation of a stock.
Dividend Yield is the ratio that measures the quantum of cash dividends that is basically paid out to shareholders relative to market value per share. To calculate it you should divide the dividend per share by the market price per share and finally multiply it with 100. When the current yield of a stock is above its historical yield it might be undervalued. If it's beneath its historical yield then it might be overvalued.