If the price of one stock is 100 denars and another is 1000 denars, does the first one have lower value than the second? Intuitively, the “expensive” one seems better, but with stocks this is very often a wrong conclusion. Below we will see why price per share alone means nothing, and how you can start valuing stocks in a simple way.
What does a stock represent?
A stock represents ownership in a company – a piece of the business. By buying a stock, you become a partial owner of the company and gain the right to a portion of its profit (dividend), if the company distributes dividends.
From this comes the simplest logic of value: if a company becomes more profitable over time, in the long run the value of ownership tends to grow as well.
In the short term, stock prices can move “irrationally” due to market emotions, news, panic/euphoria, liquidity, and speculation. But in the long run, price tends to follow intrinsic value.
Stock price vs. company value
The most common beginner mistake is confusing the “price of one share” with the “value of the company”. What matters is market capitalization – the total value of all company shares.
Formula: Market capitalization = Share price × Number of shares
Example:
- Company A: 1,000,000 shares × 100 denars = 100,000,000 denars
- Company B: 100,000 shares × 1000 denars = 100,000,000 denars
Even though the share price is different, the total market value is the same. Therefore, an “expensive stock” does not automatically mean a “valuable company”.
Basic concepts you must know
Profit (net income)
Net income is the amount left after all expenses and taxes. This is the “pie” that can be reinvested, paid out as dividends, or used for share buybacks.
Revenue
Total sales/income before expenses. A company may grow revenue, but if costs grow faster, profit can stagnate or decline.
Dividend
A portion of profit paid to shareholders. It is important to assess whether the dividend is stable, sustainable, and growing over time.
Market capitalization
The total value of the company according to the stock market (price × number of shares). This is the starting point for comparison with profit and other companies.
P/E ratio – the first tool for beginners
One of the most commonly used indicators is P/E (Price-to-Earnings). It shows how much you pay for each 1 denar of profit.
Formula: P/E = Share price / Earnings per share (EPS)
Example:
- Share price: 500 denars
- EPS (earnings per share): 50 denars
- P/E = 500 / 50 = 10
Intuitively, P/E = 10 means you are paying 10 denars in price for 1 denar of annual profit (per share), assuming profit remains unchanged. In reality, profit changes – which is why the next section is key.
Important: A low P/E may indicate undervaluation, but it may also signal problems/risks. A high P/E may indicate overvaluation, but it may also reflect expected strong growth.
Profit growth – the most important factor
P/E alone is not enough. The key idea is: the market pays more for companies that grow faster. Two companies may have similar P/E ratios, but one may grow profits at 2% annually and another at 15% – the latter has greater value growth potential.
In practice, look at:
- Profit trend over the last 3–5 years (growth/decline/volatility)
- Whether growth comes from core operations or one-off factors
- Whether margins are improving (profit growing faster than revenue)
Dividend yield – if your goal is passive income
If you invest for dividends, track the dividend yield.
Formula: Dividend yield = (Annual dividend / Share price) × 100%
Example:
- Share price: 1000 denars
- Annual dividend: 80 denars
- Dividend yield = 80 / 1000 × 100% = 8%
But don’t chase only “high yield”. A high yield sometimes means the price dropped due to problems, or that the dividend is unsustainable. Check whether the company can support the dividend.
Debt and financial stability
A profitable company can still be risky if it carries high debt. As a starting point, check:
- Debt-to-Equity – how leveraged the company is
- Interest coverage – whether profits comfortably cover interest expenses
- Whether the company has stable cash flow
In practice, for beginners: avoid companies where debt “eats up” profits or where earnings are highly unstable.
Qualitative factors – things not in the numbers
Financial metrics are only half the story. It’s worth asking a few business-oriented questions:
- Does the company have a competitive advantage (brand, network, regulatory position, technology)?
- What is management like (track record, cost discipline, transparency)?
- What is the industry like (growing or declining)?
- How exposed is it to risks (regulation, currencies, cycles, raw materials)?
Practical step-by-step approach for beginners
- Understand the business: what it sells, who its customers are, where profit comes from.
- Review 3–5 year trends: revenue, profit, margins, stability.
- Check or calculate P/E: compare with similar companies/sector.
- Check dividends: stability and growth potential.
- Check debt and risk: ensure debt is not a “hidden bomb”.
- Build scenarios: what if profit grows 5%, 10%, or stagnates?
- Leave a margin of safety: don’t buy if everything must be perfect to profit.
Conclusion
Stock valuation does not have to be complicated. As a beginner, the goal is not to find the “perfect formula”, but to start thinking like a business owner rather than a speculator.
Don’t just ask: “Will the price go up?”
Ask: “Will this company be more profitable and valuable in 5–10 years?”
If the answer is “yes”, then with high probability the stock price will follow the same path in the long run.