Fair value explained
Findx estimates a share’s value by combining the company’s earnings with a chosen price for those earnings. This guide explains the numbers and shows how to read the chart.
What does fair value mean?
A share is a small ownership stake in a company. Its share price is what buyers and sellers currently trade it for. Fair value is an estimate of a reasonable price under the assumptions you choose. The two can be different.
Start with earnings and P/E
Earnings means the company’s profit after costs. Earnings per share, or EPS , is that profit divided by the number of shares. It is not automatically a payment to you.
P/E means price divided by earnings per share. If a share costs 32 and yearly earnings are 2 per share, its P/E is 16: investors are paying 16 for each unit of annual earnings.
To estimate value, turn that calculation around. Suppose we choose a P/E of 14.5. With earnings of 2 per share, that gives a value of 29:
Where does 14.5 come from? Findx offers several valuation methods. One uses earnings growth: 10% annual growth gives a P/E of 14.5 under our formula. Other methods use analysts’ price targets, recent market pricing or your own choice.
Read the lines on a stock chart
The calculation above used simple, invented numbers. Below is the real chart for Amdocs (DOX.US). Read from left to right to follow the years. The height of each line shows a price in US dollars.
- Black — share price: what a share traded for. Its many small movements come from recorded prices.
- Green — fair value: the estimate from the selected valuation method. Compare the black line with this green boundary at the same date.
- Yellow — dividends: information about money the company pays to shareholders. This is separate from the green fair value estimate.
The pale green background fills the area beneath the fair value line throughout the chart. It does not mark a separate buy signal. What matters is whether the black price line is below or above the green boundary. The light grey area on the right marks years that use expected earnings. The dashed valuation lines use those forecasts. The black price line can extend into this area when prices are known but that year’s earnings have not yet been reported. The fair value target marker is a model estimate for a selected future date. The rows below show the year, earnings per share (EPS), their yearly change, dividends per share and free cash flow (FCF). Free cash flow is money left after running the business and paying for investments such as equipment. An E beside a figure means it is an estimate. The historical green line uses the valuation method selected now. It is a comparison with past prices, not proof of what an investor could have known at each past date.What are the forecasts and figures below the chart?
You can switch extra comparisons on using the labels below the stock chart. The Market P/E guide shows the blue comparison with past pricing. The P/E bands guide explains the upper and lower comparisons.
Explore one question at a time
Choose your valuation basis
See what changes when you choose growth, analysts’ targets, past prices or your own numbers.
Explore this guide →How Findx calculates fair value
See how falling, slow, moderate or fast earnings growth leads to a chosen P/E.
Explore this guide →The earnings behind the calculation
See how yearly earnings become the figure used on each date.
Explore this guide →Understand Market P/E
Read the blue line and compare today’s price with past market pricing.
Explore this guide →Understand P/E bands
Understand the three lines and how to adjust your own price assumptions.
Explore this guide →Prefer to watch?
A lower price than an estimate does not guarantee a good investment. Earnings can disappoint, and debt or other business risks may justify a lower price. Use the comparison to decide what to investigate next.