Stock Prices Can Be Deceptive, Here's How to Do Quick Valuation
- Muhammad Silvansyah Syahdi Muharram
- 6 days ago
- 2 min read
Stock prices on the Indonesia Stock Exchange vary greatly, ranging from fifty cents to tens of thousands of rupiah per share. However, the cheapness or expensiveness of a stock price does not always determine its quality.
Cheap stocks are not necessarily bad, and expensive stocks are not always good. Investors need to analyze whether the price is in line with its valuation.
Cheap vs "Cheap for a Reason" Stocks
Cheap ≠ Opportunity. There are two different categories: undervalued stocks and "cheap for a reason" stocks.
Undervalued stocks have prices lower than their intrinsic value or estimated value based on future performance potential, making them potentially profitable (upside). Meanwhile, some stocks have low prices due to weak fundamentals or high risks, making them a trap for investors.
On the other hand, cheap stocks with high liquidity—regardless of the quality—become an attractive combination for traders or short-term investors because they can easily enter and exit.
Are Expensive Stocks Always Good?
Conversely, a high market price does not automatically mean it's expensive in terms of valuation. The price per share is also influenced by the number of outstanding shares (which may be related to reverse stock split actions).
The relevant meaning of "expensive" in investing is having a premium valuation: Price-to-Earnings (P/E), Price-to-Book Value (PBV), and EV/EBITDA ratios higher than the sector or market average. This is usually supported by strong company fundamentals, consistent profit growth, stable dividends, and high liquidity.
However, expensive stocks can also be risky because prices may rise due to euphoria or temporary trends, rather than real performance. Stocks can become overvalued (market price far exceeds valuation) and vulnerable to correction if market expectations are not met.
Quick Checklist to Valuating the Fair Price of Stock
Look at the financial reports for the last three years: Revenue, net profit, operating cash flow.
Calculate key ratios: P/E, PBV, EV/EBITDA, Debt-to-Equity (DER), Return-on-Equity (ROE).
Check liquidity levels: Average daily transaction value and volume (ADTV), bid-offer spread, % of free float traded.
Market sentiment and news: Are there any decisions or events that affect stock price movements spontaneously?
Disclaimer: The content is made for educational purposes, not a recommendation to buy or sell a particular stock. PT KAF Sekuritas Indonesia is licensed and supervised by the Financial Services Authority (OJK).
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