Calculating the Intrinsic Value of a Stock using EPS | The Investment Quadrant by The Fifth Person

Questions › Category: Valuation Quadrant › Calculating the Intrinsic Value of a Stock using EPS

Edmund Toh asked 2 years ago

hi victor, thanks for today’s workshop.
some of the parts were a little too fast for me to absorb so here is my question.
may i confirm if the calculation for the intrinsic value of a stock is as follows?

Intrinsic Value = (EPS of stock) x (Mean Value of it’s historical PE range, i.e. the ‘horizontal line’ plotted on a PE chart)

may i know if is this correct?
thanks,
edmund toh

10 Answers

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Victor Chng answered 2 years ago

Hi Edmund,

Yes you are right. If you are still unclear, you can go through the online module below.

https://investmentquadrant.com/the-valuation-quadrant/price-earnings-ratio/

Edmund Toh replied 2 years ago

Thanks, victor. Much appreciated.

Victor Chng replied 2 years ago

Welcome :)

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James Lim answered 8 months ago

is there another method to find instrinsic value? you mentioned some companies arent accurate to use PE ratio

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James Lim answered 8 months ago

is there another method to find instrinsic value? you mentioned some companies arent accurate to use PE ratio

Jieren Zheng replied 8 months ago

You can also look at Price-to-Book, Price-to-Cashflow ratios depending on your use case.

Hope it helps.

James Lim replied 8 months ago

Hi Jieren, how to calculate with PB? We find the 10 year average of PE and then multiply by the latest book value per share?

Victor Chng replied 8 months ago

Hi James,

You can plot the PB chart using the same method for PE chart.

Victor Chng replied 8 months ago

Thanks JR.

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James Lim answered 8 months ago

so to find intrinsic value you take the current EPS of latest quarter to multiply by the average PE?

Victor Chng replied 8 months ago

Yes, take the current TTM EPS multiply by average PE

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James Lim answered 8 months ago

do we use the adjusted close price if the company has convertible warrants

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Victor Chng answered 8 months ago

Hi James,
There is no need to adjust the close price if the company have convertible warrants. you just need to take diluted EPS or BVPS as it has account for conversion.

James Lim replied 8 months ago

so the only instance we use the adjusted close price is when there is a split share? what about bonus share issue? say for example 1 bonus share per 4 share

Victor Chng replied 8 months ago

Hi James,

You can just use the close price instead of the adjusted close price. I recently realised that close price have accounted for split and bonus already.

James Lim replied 8 months ago

so when is the instance we use adjusted close price?

Victor Chng replied 8 months ago

Hi James,

There is no need to use adjusted close as mentioned above the close price have take into account of split.

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James Lim answered 8 months ago

does it mean to say if the intrinsic share price is lower than the trading share price we should not enter position?

Jieren Zheng replied 8 months ago

I would see it like buying something, you can buy at whatever prices, but it is always a good deal when it is sold at a discount. But bear in mind that not everyone goes on discount often. So it is a balance.

Victor Chng replied 8 months ago

In most cases, I always look to buy either at fair or undervalued.

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James Lim answered 8 months ago

what should we do when the earnings are reported in for eg RMB but the share price was traded in SGD? how do we adjust the number to do the calculation?

Victor Chng replied 8 months ago

Hi James,

You have to convert the yearly earnings from RMB to SGD and use the SGD share price to plot the chart.

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James Lim answered 8 months ago

Hi,

So it means i take the share price of eg for 1st Jan 2021 and the book value 2020 to calcuate the PB ratio?

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Victor Chng answered 8 months ago

Hi James,

If you want to calculate the latest PB ratio – you should take the latest share price over the latest quarter book value in 2021.