Gathering Information

• When you want to accurately evaluate a stock, you must gather information about the company. Instead of focusing on brand names or your general impressions of a company, you need to dig deeper and find out specific information about it. You will need copies of financial statements like the balance sheet and the income statement. You can get copies of the financial statements from the company's website in most cases. You can also get this information from your broker.
  
  

Valuation Multiples

• Once you obtain financial information about a company, you can then use valuation multiples to help determine the accurate value of a stock. These are formulas that are commonly used by investors to analyze companies. For example, the price-earnings ratio or p/e ratio is a calculation that compares the price of a share of stock to the earnings per share that the company brings in. If the price is well above the earnings, it could mean the stock is overvalued.
  
  

Making Comparisons

• When you use financial information and ratios, you need a point of comparison so you can understand whether a company is overvalued. To do this, you will most likely need to compare the companies to other companies in the same industry. If you have a price-earnings ratio or some other ratio calculated on a company, you do not necessarily know if that is low or high until you compare it to another similar company.
  
  

Future Potential

• In addition to looking at financial ratios, you should also use some common sense when evaluating a stock. You need to look at the business plan of the company and find out exactly what it will be working on in the future. Try to determine if the company has any new products or services that will be coming out in the future. If the company looks promising and the numbers check out, you may have found an undervalued stock.