How to value a stock?

We already know that Warren Buffet buy shares when they trade below their fair price.
Similarly to us as Value Investor in the stock market buy at below market value and earn money as they correct up to their real value.
What we have to do is perform Valuation on a stock.
Valuation is all about assessing the intrinsic value of a stock and compare it with the market price in order to understand whether the stock is trading at right price and if you should invest in it.

So million dollar question, how to value a stock?
There are six ways to determine it as below:

1. Price earning ratio (P/E)
2. Price to Book ratio (P/B)
3. Return on Equity (ROE)
4. Price to Earning to Growth ratio (PEG)
5. Debt to Equity ratio (Total Debt/shareholder equity)

(1) Price earning ratio (P/E)
Let's start with the simplest ratio first. PE ratio is the most widely used and data is easily available. The P/E ratio is calculated by dividing the price of the stock by the total of its 12-months trailing earnings. Typically companies that are growing rapidly will have higher P/E ratios compared to mature businesses with slower growth rates.
I pulled back the StarBiz publication on 25 April and check on top 15 Bank PE in Malaysia.

Let's take Maybank for this study again, The closing price for the Maybank on 24 April is RM7.36, and the earning as of 31-12-2019 is 72.93 sen per share, PE ratio will be 9.9 times. It means that we have to pay 9.9 in order to earn $1from Maybank.

From the past 5 years historical P/E ratio for Maybank has been 12.
The current P/E ratio is 9.9 times.
If it were trading at its historical P/E ratio of 12, the current stock price should be 12 times $0.7293 equals $8.75.
On this basis, current stock price of Maybank is under value.

(2) Price to Book ratio (P/B)

The price-to-book, or P/B ratio, is calculated by dividing a company's stock price by its book value per share. To determine a company's book value, you'll need to look at its balance sheet, which is defined as its total assets minus any liabilities.

Low P/B ratios can be indicative of undervalued stocks, and can be useful when conducting a thorough analysis of a stock.

Book value is equal to a company's current market value divided by the "book value" of all of its shares. Refer to below 3 steps of defining of the Price to book ratio.

Refer to the Maybank history of its P/B value is about 1.3, current is at 1.03 which is lowest in the last 5 years.

(3) Return on Equity (ROE)
One measure commonly used is return on equity (ROE) which indicates how much profit a company generates from shareholders' equity. P/B ratio and ROE usually correlate well, and any large discrepancy between them may indicate a cause for concern.

ROE is an indicator of how effective management is at using equity financing to fund operations and grow the company. For example a return on 1 means that every dollar of common stockholders’ equity generates 1 dollar of net income.

From Maybank Financial Report, the ROE is range from 10% - 15%. The recent year is sustain at around 10%.

(4) Price to Earning to Growth ratio (PEG)
The PEG ratio formula for a company is as follows:

The PEG ratio is considered to be an indicator of a stock's true value, and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued.

Let's compare the 3 Top 3 bank in Malaysia. From the table, we see that in term of PE, CIMB is the lowest compare to Maybank and Public Bank. But all the three bank having negative growth in term of the earning. The worst growth is CIMB.

 As for the 3 food companies, in term of PE, Dutch Lady look more attractive than Nestle and F&N. As for the PEG, Dutch Lady also stand out compare to the other two companies. This shows that when we take possible growth into account, Dutch Lady could be the better option because it's actually trading for a discount compared to its value

(5) Debt-to-Equity Ratio
A debt-to-equity ratio is calculated by taking the total liabilities and dividing it by the shareholders' equity:

Debt-to-equity ratio = Liabilities / Equity

It is also a measure of a company's ability to repay its obligations. When examining the health of a company, it is critical to pay attention to the debt/equity ratio. If the ratio is increasing, the company is being financed by creditors rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline. Thus, companies with high debt-to-equity ratios may not be able to attract additional lending capital.

Again look back the 3 bank companies and 3 Food companies on its Debt/Equities ratio:

Developed your own checklist like below:

• PE below sector average
• Reasonable PEG 
• Reasonable PB
• Low Debt: Equity; 1 to 2 (0.5)
• ROE of >17%

As a value investor, only buy the stock if the price of the stock goes below the market value of the stock.