How do you research a stock? How do you determine whether a share is undervalued or overvalued?

 

The main purpose of stock research is to determine a company's true worth (intrinsic value) and compare it with the price at which the market is trading it.

Step 1: Understand the business

First, look at the following:

            What does the company do?

            How does it make money?

            What is the industry's growth potential for the future?

            Who are the competitors?

If you do not understand the business, it is better to avoid the stock.

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Step 2: Read financial statements

Make sure to check these three things:

Income Statement

            Revenue (Sales)

            Net Profit

            EPS (Earnings Per Share)

Look at the growth over the last 5 years.

Balance Sheet

            Debt

            Cash

            Assets and Liabilities

Cash Flow Statement

            Operating Cash Flow should be positive.

            Cash should be generated alongside profit.

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Step 3: Check important ratios

P/E Ratio (Price to Earnings)

P/E = Price per Share / Earnings per Share

            If the P/E is much higher than the industry average, the stock might be expensive.

            If the P/E is very low, it could be undervalued, or there might be an underlying problem with the company.

ROE (Return on Equity)

An ROE above 15% is generally considered good.

Debt-to-Equity Ratio

Companies with lower debt are comparatively safer.

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Step 4: How to determine if a stock is undervalued or overvalued?

You cannot tell just by looking at the share price.

A share priced at ₹100 can be overvalued, while a share priced at ₹5,000 can be undervalued.

 

Method 1: P/E Comparison

Example:

Company A:

            EPS = ₹20

            Share Price = ₹200

P/E = 10

Industry Average P/E = 20

If the company has good growth and its P/E is significantly lower than the industry average, the stock might be undervalued.

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Method 2: PEG Ratio

PEG = (P/E) / Growth Rate

            PEG < 1 → Often undervalued

            PEG ≈ 1 → Fairly valued

            PEG > 1 → Relatively expensive

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Method 3: Intrinsic Value Estimate

Great investors like Warren Buffett determine a company's intrinsic value by estimating future earnings and cash flows.

Simple rule:

            Intrinsic Value > Market Price → Undervalued

            Intrinsic Value < Market Price → Overvalued

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Step 5: Check the Management

            Promoter holding is stable or increasing.

            Corporate governance is good.

            Management credibility is strong.

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A Beginner's Research Framework

Ask these 7 questions before buying any stock:

            Do I understand the business?

            Have sales been growing for 5 years?

            Has profit been growing for 5 years?

            Is debt under control?

            Is ROE 15%+?

            Is the P/E reasonable compared to the industry?

            Is there potential for future growth?

If 5–6 out of the 7 answers are "yes," the stock might be worth a detailed analysis.

If you wish, I can use a real-world example of an Indian stock (such as Reliance Industries, Tata Consultancy Services, or any other company) to demonstrate how to conduct a step-by-step analysis.

I prefer this response.