How to Calculate a Stock's Fair Value?

A stock's market price doesn't necessarily reflect its true value. A stock can be overpriced (overvalued) or underpriced (undervalued). Fair value is the estimated "should-be" price based on the company's financial performance. If you buy below fair value, you're getting a discount — and that's the core of value investing.

Basic Formula: Fair Value = EPS × Fair PER

The most common way to calculate fair value: Fair Value = EPS × Fair PER • EPS (Earnings Per Share) = Net income divided by shares outstanding. This shows profit per share. Read more at What is EPS. • Fair PER (Fair Price to Earnings Ratio) = How many times investors are willing to pay for every Rp 1 of earnings. Read at What is PER. Fair PER is determined by several factors: 1. ROE (Return on Equity) • ROE > 18%: Fair PER 20–25x (very efficient company) • ROE 12–18%: Fair PER 15–20x (moderate) • ROE < 12%: Fair PER 10–15x (less efficient) 2. Earnings Growth (EPS Growth) • Higher growth justifies higher PER • Formula: Growth × 1.5 to Growth × 2 3. Industry Sector • Banking/Finance: Fair PER 12–18x • Technology: 18–28x • Real Estate: 8–14x • Consumer: 14–22x • Energy/Materials: 8–14x 4. Company's Historical PER • 5-year median PER × 0.85 to × 1.1 Example: If EPS = Rp 500 and Fair PER = 15x, then: Fair Value = Rp 500 × 15 = Rp 7,500

Margin of Safety: The Safe Buy Zone

Benjamin Graham (Warren Buffett's mentor) introduced the concept of Margin of Safety — buying BELOW fair value as a "cushion" in case our calculations aren't 100% accurate. Safe Buy = Fair Value × (1 - Margin of Safety %) Example with 20% margin of safety: • Fair Value = Rp 7,500 • Safe Buy = Rp 7,500 × (1 - 0.20) = Rp 6,000 • Meaning: Buy at Rp 6,000 or below to get a 20% safety margin What's the ideal margin of safety? • Stable blue chip stocks: 10–15% is enough • Mid cap stocks: 15–25% • Small cap / speculative stocks: 25–40% The more uncertain the company quality, the larger the margin of safety you need. If current price is BELOW safe buy → attractive buying zone. If current price is ABOVE fair value → stock is expensive, wait for a drop.

Must You Enter Below Fair Value?

Ideally: YES. But not always mandatory. It depends on your strategy: Value Investor (buy below fair value) • Seek 10–30% discount from fair value • Patient waiting, sometimes weeks or months • Best for: long-term investors focused on fundamentals • Advantage: lower downside risk, high upside potential Growth Investor (may buy above fair value) • Buy stocks with very high growth even if PER is expensive • Example: tech stocks with 30%+ annual earnings growth • Risk: if growth slows, price can drop drastically Trader (less concerned about fair value) • Focus on momentum, support/resistance, and technicals • Fair value is additional reference, not the primary guide Conclusion: Entering below fair value provides margin of safety — you have a cushion if the market drops. But stocks above fair value aren't necessarily bad, as long as you understand the risks.

Example: BKSL (Sentul City Tbk)

BKSL data from chart: • Current price: Rp 101 • EPS: Check on the detail page • Sector: Real Estate (Fair PER range: 8–14x) Assuming BKSL EPS = Rp 8: • Fair Value = Rp 8 × 10 (average Real Estate PER) = Rp 80 • Safe Buy (20% margin) = Rp 80 × 0.8 = Rp 64 At Rp 101, BKSL trades above fair value (PER 12.6x). From a valuation standpoint, BKSL is not cheap. But technically, BKSL has Support 1 at Rp 111 and RSI at 33.30 (approaching oversold). This shows that fair value and technical analysis can give different signals — use both. Check BKSL's fair value directly at the Fair Value Calculator. View stock details at the BKSL page.

Example: TLKM (Telkom Indonesia Tbk)

TLKM is a blue chip stock with more stable data: • Sector: Communication (Fair PER range: 12–20x) • ROE: Consistently above 15% • Earnings: Stable and growing Assuming TLKM data: • EPS = Rp 250 • Fair PER = 16x (based on 18% ROE, communication sector) • Fair Value = Rp 250 × 16 = Rp 4,000 • Safe Buy (15% margin) = Rp 4,000 × 0.85 = Rp 3,400 If TLKM's current price is Rp 3,600: • Discount from fair value = (4,000 - 3,600) / 4,000 × 100 = 10% • Upside potential = (4,000 - 3,600) / 3,600 × 100 = 11.1% • Price is below fair value but above safe buy → grey zone, can enter with small lots first If TLKM drops to Rp 3,400 (safe buy zone): • This is the ideal entry zone for value investors • 15% discount from fair value • 17.6% upside potential to fair value Check TLKM's fair value directly at the Fair Value Calculator. View stock details at the TLKM page.

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Practical Tips

Always compare current price vs fair value BEFORE buying
Use 10–15% margin of safety for blue chips, 20–30% for small caps
Don't just look at low PER — also check ROE, earnings growth, and debt
Fair value is not an exact price — it's an estimate. Combine with technical analysis
Re-check fair value every quarter when new financial reports come out

Common Mistakes

Buying stocks just because PER is low without checking if earnings are actually good
Ignoring margin of safety — buying right at fair value without a cushion
Treating fair value as an exact price. Fair value is an estimate, it can change
Not updating calculations when new financial reports come out
Comparing PER across different sectors (tech vs banking) without context

Next Step

Calculate the fair value of your target stock now. Enter the stock ticker and see if it's overpriced or discounted.

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FAQ

Is fair value always accurate?

No. Fair value is an estimate based on available financial data. If data changes (profit drops, debt rises), fair value also changes. That's why we use margin of safety as a cushion.

If a stock is above fair value, will it definitely drop?

Not necessarily. Stocks can stay above fair value for weeks or even months, especially if earnings growth is very high. But statistically, stocks trading far above fair value have higher correction risk.

What's the difference between fair value and analyst target price?

Fair value is calculated from the company's financial data (EPS, PER, ROE). Analyst target prices can include sentiment factors, industry prospects, and future growth assumptions. They can differ. It's safer to use fair value + margin of safety.

What method does InvestSaham use to calculate fair value?

InvestSaham uses the EPS × Fair PER method, where Fair PER is automatically calculated based on ROE, earnings growth, industry sector, and the company's historical PER. You can also set Fair PER manually if you have your own analysis.

How to Calculate a Stock's Fair Value?

Basic Formula: Fair Value = EPS × Fair PER

Margin of Safety: The Safe Buy Zone

Must You Enter Below Fair Value?

Example: BKSL (Sentul City Tbk)

Example: TLKM (Telkom Indonesia Tbk)

Learn More

Practical Tips

Common Mistakes

Related Reading

Next Step

FAQ

How to Calculate a Stock's Fair Value?

Basic Formula: Fair Value = EPS × Fair PER

Margin of Safety: The Safe Buy Zone

Must You Enter Below Fair Value?

Example: BKSL (Sentul City Tbk)

Example: TLKM (Telkom Indonesia Tbk)

Learn More

Practical Tips

Common Mistakes

Related Reading

Next Step

FAQ