How to Value Stocks – For Beginners – Part 2

In the first part, we laid the foundations: what a stock represents, why the price per share alone does not mean much, and why P/E, profit growth, dividends, and debt are important for a basic evaluation.

The natural next question is: how do you use this information to determine whether a stock is expensive, fairly valued, or cheap?

In this second part, we will go one step further: from reading indicators to a practical framework for estimating fair value.

What is “Fair Value”?

Fair value is not a magical or precise number. It is a reasonable range within which the value of a company could lie based on its profit, growth, risks, and quality.

The market price today can be:

• below fair value – potential undervaluation
• around fair value – approximately realistic valuation
• above fair value – potential overvaluation

It is important to understand: fair value is not a “guarantee” that the market will recognize it quickly. Sometimes a stock can remain cheap or expensive for a long time. That is why valuation is more a tool for discipline and decision-making, rather than short-term prediction.

Two Main Approaches to Valuation

Simplified, for beginners there are two practical ways to think:

1. Relative valuation – comparing the company with other similar companies
2. Intrinsic valuation – estimating how much the business is worth based on future profits or cash flows

In practice, it is best to use a combination of both approaches.

1. Relative Valuation: Comparing with Similar Companies

This is the most common first step. Instead of inventing an “ideal” value from scratch, you look at how the market values similar companies.

Which indicators are most commonly used?

• P/E – price relative to earnings
• P/B – price relative to book value
• Dividend Yield – dividend return
• EV/EBIT or EV/EBITDA – more common in advanced analysis

Example

Imagine you are analyzing a bank. If similar banks are trading at a P/E of 7 to 9, and your bank has a P/E of 5, that may indicate undervaluation.

But the key question immediately follows: why is it cheaper?

• Does the market see higher risk?
• Is the profit temporarily high and unlikely to be repeated?
• Is there weaker capital quality, higher debt, or regulatory risk?

2. Don’t Look at Just One Year – Use “Normalized” Profit

One of the most common mistakes is valuing a company based on a single exceptionally good or bad year.

For example, if profit in 2025 was very high due to a one-time event – sale of assets, currency gains, unusually low costs – then P/E may appear artificially low.

That is why it is useful to think in terms of normalized profit, meaning profit that is more representative of the company in a “normal” year.

How to estimate it roughly?

• Look at the last 3–5 years
• Remove obvious one-time effects
• Check whether profit is cyclical
• Ask yourself what is sustainable and what is not

Instead of saying: “The company earned 100 million, so that’s what it’s worth,” it is better to say: “On average, across a cycle, this company can probably earn around X.”

3. How to Think About “Fair P/E”

In the first part, we saw what P/E means. Now comes the harder part: what P/E is justified?

There is no universal correct answer. A higher P/E can be justified if the company has:

• stable and high-quality profit growth
• a strong balance sheet and low debt
• high return on capital
• a strong competitive position
• a predictable business model

A lower P/E is logical if the company has:

• weak or unpredictable growth
• a cyclical business
• high debt
• regulatory or operational risks
• unstable earnings

One simple beginner framework is to ask yourself:

• Would you pay more for a company growing 12% annually than one that is stagnating? Yes.
• Would you pay more for a company with a strong balance sheet than a highly leveraged one? Yes.
• Would you pay more for a predictable business than a chaotic one? Yes.

This means that “fair P/E” is a function of growth + quality + risk.

4. A Simple Framework for Estimating Fair Price

Here is a practical, simplified approach for beginners:

1. Estimate normalized EPS – not one-off, but sustainable earnings per share
2. Determine a reasonable P/E range based on similar companies, growth, and risk
3. Calculate a fair price range:
   Fair price ≈ EPS × reasonable P/E

Example:

• Normalized EPS = 60 denars
• Reasonable P/E range = 8 to 10
• Fair price ≈ 60 × 8 = 480 denars to 60 × 10 = 600 denars

If the stock is trading at 430 denars, you may have an interesting margin of safety. If it is trading at 720 denars, the market may already be pricing in significant optimism.

5. How to Include Dividends in Valuation

For companies that regularly pay dividends, dividends are not just a “bonus” – they are an important part of total return.

If two companies have similar profits and similar risk, but one pays a stable 6% dividend and the other 1%, the first may be more attractive for an investor seeking cash flow.

But the same rule applies: don’t look only at size, look at sustainability.

Questions worth asking:

• Is the dividend paid from real earned profit?
• Does the company have sufficient liquidity?
• Is the payout stable over multiple years?
• Does the dividend still allow room for business growth?

6. The Balance Sheet Can Dramatically Change the Picture

Two companies with the same profit are not necessarily equally valuable. If one has strong cash, low debt, and a healthy balance sheet, while the other is highly leveraged, the risk is completely different.

That is why valuation should always be tied to financial stability.

Practically, as a beginner you can think like this:

• strong balance sheet = deserves higher confidence
• weak balance sheet = requires more caution and a lower price

This is why “cheap” is sometimes truly cheap, and sometimes just risky.

7. Think in Scenarios, Not Certainties

A good investor does not try to be 100% certain. Instead, they build several reasonable scenarios.

Example framework:

• Bad scenario: profit stagnates or declines
• Base scenario: profit grows moderately
• Good scenario: profit grows faster than expected

For each scenario, you can assume a different EPS and a different justified P/E. This way, instead of relying on a single “perfect” estimate, you get a better picture of the range of possible outcomes.

This is especially important in smaller and less liquid markets, where movements can be stronger and information is slower to be reflected in prices.

8. Most Common Valuation Mistakes

• Focusing only on low P/E without understanding risk
• Ignoring profit quality – one-off vs. sustainable earnings
• Ignoring the balance sheet – debt can destroy the investment thesis
• Comparing inappropriate companies – different sector, risk, and cycle
• Overprecision – valuation is a range, not a surgical number
• Buying without margin of safety – even a good company can be a bad investment if overpaid

9. Margin of Safety – Where Discipline Matters

If you estimate the reasonable value of a stock at 500–600 denars, it does not mean you should buy at 590 just because it is “below fair value.”

Why? Because you can be wrong in:

• profit estimation
• expected growth
• risk assessment
• management quality
• sector conditions

Margin of safety means not buying when everything looks “just right,” but when there is enough buffer in case some assumptions do not turn out perfectly.

This does not always make you smarter, but it often makes you less vulnerable to mistakes.

Practical Step-by-Step Approach for Part 2

1. Extract 3–5 years of data for revenue, profit, dividends, and debt
2. Estimate normalized profit – what is sustainable?
3. Calculate EPS based on more realistic profit
4. Look at similar companies and their metrics
5. Determine a reasonable P/E range based on growth, quality, and risk
6. Build a fair price range instead of a single number
7. Check dividends and balance sheet to avoid missing key risks
8. Include a margin of safety before making a decision

Conclusion

Valuation is not the art of “guessing price,” but a process of approaching a reasonable estimate. The better you understand the business, profit, growth, and risk, the better your valuation framework will be.

In practice, a good investor does not just ask: “Does this look cheap?”

They ask: “Cheap relative to what? Relative to what level of profit? With what level of risk? And how confident am I that this profit is sustainable?”

If the first part was about understanding the basic tools, the second part is about how to turn those tools into a more reasonable estimate of fair value.