A good evaluation of how a company’s share price compares to its earnings is called, oddly enough, the P/E Ratio (that would of course be Price/Earnings, but you knew that). This will give you a general idea of whether a stock is undervalued (the price compared to earnings is too low) or overvalued (the price compared to earnings is too high). The typical result totally depends on what sector (or industry) you are looking at.
The market value is the price of the stock, while earnings per share are typically calculated based on the average of the last four quarters’ earnings. Here is a simple example:
Company A’s stock is worth $20 a share, and their earnings average for last year was $2 per share. Therefore, the P/E Ratio would equal to 20/2, or 10. This means that for every $1 a company makes, investors pay $10. The higher the P/E ratio, the higher a company is valued, and the lower the P/E Ratio, the lower the valuation.
SogoTrade will automatically display the P/E Ratio for each stock when you view a chart. However, you should examine ratios by looking at the industry as a whole, and comparing the ratio between companies in the same sector (a sector is like an industry; biotech, farming, and manufacturing are all sectors). For instance, a typical P/E ratio for the technology sector is 40, while the textile industry has an average ratio of 8. Keep this in mind when conducting your research.