There are several methods for evaluating and calculating the share price of a company. From my experience, the calculation of a private business tends to always be more accurate than a calculation of a public company. The future expectations that should be baked into the price makes it usually impossible to compute a fair or intrinsic price anyway. But here are three common methods that are good to be aware of, especially if your are actively scalping the fluctuations of the price reversion.

1. The price-to-earnings (P/E) ratio is a popular method for evaluating the share price of a company. It is calculated by dividing the current share price by the company’s earnings per share (EPS). A high P/E ratio indicates that investors are willing to pay more for each dollar of the company’s earnings, while a low P/E ratio indicates that the share price is relatively low compared to the company’s earnings. The average P/E on a stock exchange depends a lot on the country and which development phase the economy is in.

You can argue about differences in the trailing and forward P/E, the accounting principles and if the earnings length should be 12 months. All else being equal, you can compare the P/E of a company to it’s competitors, the sector and the main index to see if it’s currently relatively cheap or expensive.

2. A discounted dividend model (DDM) is a method used to value a company’s stock by discounting its future dividends to the present. Here is an example of how to perform a DDM calculation:

Suppose a company is expected to pay the following dividends over the next five years:

Year 1: $1.00 Year 2: $1.10 Year 3: $1.20 Year 4: $1.30 Year 5: $1.40

Assume the company’s cost of capital (i.e., the required rate of return) is 10%. The present value of these future dividends can be calculated as follows:

Year 1: $1.00 / (1 + 10%) = $0.909 Year 2: $1.10 / (1 + 10%)^2 = $1.009 Year 3: $1.20 / (1 + 10%)^3 = $1.107 Year 4: $1.30 / (1 + 10%)^4 = $1.204 Year 5: $1.40 / (1 + 10%)^5 = $1.300

The total present value of the future dividends is $0.909 + $1.009 + $1.107 + $1.204 + $1.300 = $5.629. This means that if the company were to pay all of the dividends immediately, their total value would be $5.629.

To determine the value of the company’s stock, we must divide the present value of the dividends by the cost of capital. In this case, the value of the company’s stock would be $5.629 / 10% = $56.29. This is the value that an investor would be willing to pay for the company’s stock based on the expected future dividends.

The intrinsic value calculated using the dividend discount model can then be compared to the current share price to determine whether the stock is undervalued or overvalued.

3. A discounted cash flow (DCF) calculation is a method used to determine the present value of a future stream of cash flows. Here is an example of how to perform a DCF calculation:

Suppose a company is projected to generate the following cash flows over the next five years:

Year 1: $100 Year 2: $120 Year 3: $140 Year 4: $160 Year 5: $180

Assume the company’s cost of capital (i.e., the required rate of return) is 10%. The present value of these future cash flows can be calculated as follows:

Year 1: $100 / (1 + 10%) = $90.91 Year 2: $120 / (1 + 10%)^2 = $109.09 Year 3: $140 / (1 + 10%)^3 = $126.83 Year 4: $160 / (1 + 10%)^4 = $144.05 Year 5: $180 / (1 + 10%)^5 = $160.75

The total present value of the future cash flows is $90.91 + $109.09 + $126.83 + $144.05 + $160.75 = $631.63. This means that if the company were to receive all of the cash flows immediately, their total value would be $631.63.

The intrinsic value calculated using the DCF method can then be compared to the current share price to determine whether the stock is undervalued or overvalued.

The problem is the reliability of the future cash flow. Unless the company is engaged in a business with an almost certain cash flow, the DCF formula is perhaps more suitable for examining possible scenarios.

So all in all there are several methods for evaluating and calculating the share price of a company, including the P/E ratio, dividend discount model, and discounted cash flow. There are of course more alternatives, such as the Replacement value, Price-to-book value and Liquidation value. The right method to use will depend on the specific circumstances of the company and the information available. Note that the available data is often old and future expectations affect the calculations a lot.But if the data source and the data  quality is consistent, you get the real value of the calculations from simple comparison – regardless of how complex you make the calculation.  The question is: Are you sure you are better at pricing a company than the public market?