How to Value a Stock — The Exact Method Behind Every Target on This Site
Price is a fact. Value is an argument.
The price of a stock is on your screen right now — precise, updated every second, and completely silent about whether it is a bargain or a trap. Value is different: it is an argument you construct from the business’s numbers, and like any argument it can be strong, weak, or dishonest.
This guide teaches the construction. It is the exact method behind every price target on this site — which means that after reading it, you can check our work. That is the point. Research you cannot check is just opinion with fonts.
The toolkit: five ratios, five traps
Every ratio answers one question and hides one trap. Learn both halves.
| Ratio | The question it answers | What “good” roughly looks like |
|---|---|---|
| P/E | How many years of today’s profit am I paying? | Under ~20 for slow growers, under ~35 for fast ones |
| PEG | Is the P/E justified by growth? | Under ~1.5 |
| ROCE / ROE | Does this business earn well on its capital? | ROCE above 15%, consistently |
| P/B | What am I paying per rupee of net assets? | Matters mainly for banks/lenders: 1–3× |
| EV/EBITDA | What is the whole business worth vs its cash earnings? | Under ~12–15, debt included |
P/E (price ÷ earnings per share). A P/E of 20 means you pay ₹20 for ₹1 of annual profit — a 5% “earnings yield”. The trap: cyclical peaks. NALCO showed a P/E of 10 this year — cheap! — but on aluminium-cycle-peak earnings; on normal-cycle earnings the same price is 15–19×. Always ask: is this year’s E a normal year?
PEG (P/E ÷ earnings growth rate). A 40 P/E with 40% growth (PEG 1.0) can be cheaper than a 15 P/E with 5% growth (PEG 3.0). The trap: which growth rate? A five-year CAGR measured from a collapsed covid base made IRCTC’s PEG look like 0.55 when the honest three-year figure said ~2.5. Use a growth period that starts from a normal year.
ROCE and ROE. These measure the machine, not the price: how much profit the business generates per rupee of capital it employs. A business earning 30% on capital compounds; one earning 8% treads water whatever its P/E. The trap: windfall years. Muthoot’s returns are gold-price-assisted right now; a one-year ROCE spike is weather, a ten-year ROCE record is climate. We screen on 5-year averages for exactly this reason.
P/B (price ÷ book value). For most operating companies, book value is an accounting relic. For banks and lenders, it is the core metric — their assets are money. HDFC Bank at 1.9× book versus its own 3–4.5× history is a valuation statement no P/E can make as cleanly. The trap: a cheap P/B with rotten assets inside it — always check GNPA next to a bank’s P/B.
EV/EBITDA. Enterprise value (market cap + debt − cash) against operating cash earnings — it stops a debt-loaded company from looking cheap on P/E alone. The trap: EBITDA ignores real costs (interest, tax, capex). It compares capital structures; it does not replace profit.
The quality gate comes before the price gate
A cheap price on a bad business is a slow way to lose money. Before valuing anything, we require (this is literally our screening bar for the internal 110-stock universe):
- ROCE above 15% — sustained, not one hot year
- Debt-to-equity below 0.5 — survivability is non-negotiable
- Real cash flow — profits that arrive as cash (CFO ≈ operating profit over time)
- Clean promoters — meaningful holding, zero pledged shares
- Growth that isn’t bought — rising sales without endless equity dilution
Only what passes the gate deserves a valuation. Everything else is a trade, not an investment.
The Gale method: bear / base / bull, with the arithmetic shown
Every target on this site is built the same way. Steal it.
Step 1 — Start from honest EPS. Current-year or trailing EPS, adjusted mentally for anything one-off (windfall other income, a tax quirk, a cycle peak).
Step 2 — Choose three growth paths. Bear: what if the main risk bites? Base: something modestly below the recent record (records regress). Bull: things go right, within historical precedent.
Step 3 — Choose three multiples. Not fantasy numbers — points within the stock’s own historical P/E range, bear at the low end, bull near the high end.
Step 4 — Multiply and tabulate. EPS path × multiple = target per year. Publish all three so the reader sees the risk, not just the dream.
Worked example — HDFC Bank (from the full article): trailing EPS ₹51.35. Growth: bear 8%, base 13%, bull 17% (its 5-year record is 19% — the base deliberately sits below it). Multiples: 13× / 17× / 21× (its decade range). Four years out: bear 51.35 × 1.08⁴ × 13 ≈ ₹910; base 51.35 × 1.13⁴ × 17 ≈ ₹1,425; bull 51.35 × 1.17⁴ × 21 ≈ ₹2,020. Every number checkable, every assumption arguable — which is the point.
Step 5 — Compare to today’s price. If even the bear case sits near the current price, the downside is doing your safety work. If only the bull case justifies today’s price, you are being asked to pre-pay for perfection — walk.
When the method says “don’t”
Three situations where we refuse to publish a normal target:
- Loss-makers — there is no E to multiply; that is a turnaround speculation, not a valuation.
- Cycle peaks — value the normalised earnings or wait (our NALCO piece is a live demonstration of saying no at ₹380).
- Binary events — a stock riding one court case or one drug approval needs scenario probabilities, not a P/E.
FAQ
What is the best ratio to value a stock? None alone. P/E for the price, PEG for growth-adjustment, ROCE for quality, P/B for lenders, EV/EBITDA for debt-heavy firms — conclusions come from the combination, and from checking each ratio’s trap.
What is a good P/E ratio in India? Context decides: the Nifty has averaged ~20–22× in recent years. A 12× cyclical at peak earnings can be expensive; a 35× compounder with a 25% growth record can be fair. Always pair P/E with growth (PEG) and quality (ROCE).
How do you set a share price target? EPS path × multiple band, in three scenarios, with every assumption shown — the five steps above. Distrust any target that arrives without its arithmetic.
Is a low P/B always good for bank stocks? Only with clean assets. Low P/B + high GNPA is a value trap; low P/B + sub-1% GNPA (see Karur Vysya) is an opportunity.
This guide is education, not personalised investment advice. We are not SEBI-registered advisers. Ratios and examples reflect data as of August 2026. Do your own research and consult a registered adviser before acting.