How to Estimate Price Targets for Stocks By James Collins, eHow Contributor.

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Presentation transcript:

How to Estimate Price Targets for Stocks By James Collins, eHow Contributor

The price to earnings (PE) ratio PE ratio = Divide the price of a stock by earnings per share for the PE ratio. PE ratio = Divide the price of a stock by earnings per share for the PE ratio. Stocks represent a unit of ownership and investors in stocks are rewarded by increases in share price or company distributions such as a quarterly (yearly) dividend. Stocks represent a unit of ownership and investors in stocks are rewarded by increases in share price or company distributions such as a quarterly (yearly) dividend.

Stock Price The higher the price of the stock the better the investment. This makes investment a game of price targets—knowing when to enter and when to get out. The higher the price of the stock the better the investment. This makes investment a game of price targets—knowing when to enter and when to get out. It is difficult to know the true value of a company’s stock compared to market demand. It is difficult to know the true value of a company’s stock compared to market demand. One measure investors use to determine stock value is called the price to earning (PE) ratio. One measure investors use to determine stock value is called the price to earning (PE) ratio.

Instructions 1. Obtain the most recent stock price for the target company from your favorite investment research site, by calling the company or by contacting your stock broker or bank. 1. Obtain the most recent stock price for the target company from your favorite investment research site, by calling the company or by contacting your stock broker or bank. 2. Obtain the annual report for the company in which you are interest. You can get this on the company’s website or by contacting the company’s investor relations department. 2. Obtain the annual report for the company in which you are interest. You can get this on the company’s website or by contacting the company’s investor relations department.

Instructions 3. Turn to the income statement and find the number earnings per share (EPS), which usually is located at the bottom of the income statement. 3. Turn to the income statement and find the number earnings per share (EPS), which usually is located at the bottom of the income statement. 4. Divide the current price of the stock by the earnings per share. In general, the higher the number the more overvalued the company is. 4. Divide the current price of the stock by the earnings per share. In general, the higher the number the more overvalued the company is.

Instructions 5. Obtain the average PE ratio for at least five other companies in the same industry. 5. Obtain the average PE ratio for at least five other companies in the same industry. 6. Estimate a price target by multiplying the average PE ratio by the target company’s EPS, This is the price the stock should be trading at in the market according to market valuations. For instance, if the price target had a EPS of $5 and the average PE ratio for other companies in the same industry is 10, then the price estimate of the target stock is $5 multiplied by 10 or $ Estimate a price target by multiplying the average PE ratio by the target company’s EPS, This is the price the stock should be trading at in the market according to market valuations. For instance, if the price target had a EPS of $5 and the average PE ratio for other companies in the same industry is 10, then the price estimate of the target stock is $5 multiplied by 10 or $50.