Price Target (Definition, Formula) - WallStreetMojo

Price Target Definition · Current P/E = 80/2 = $40 · = 80 * (40/32) · Price target helps an investor to decide whether he should hold the stock in expectations of ... SkiptoprimarynavigationSkiptomaincontentSkiptoprimarysidebarSkiptofooter Home»InvestmentBankingResources»ValuationGuides»PriceTargetArticlebyNitiGuptaReviewedbyDheerajVaidya,CFA,FRM PriceTargetDefinition PriceTargetinthecontextofstockmarkets,meanstheexpectedvaluationofastockinthecomingfutureandthevaluationmaybedoneeitherbythestockanalystsorbytheinvestorsthemselves.Foraninvestor,pricetargetreflectsthepriceatwhichhewillbewillingtobuyorsellthestockataparticularperiodoftimeormarkanexitfromtheircurrentposition. PriceTargetFormula PriceTarget=CurrentMarketPrice*[(CurrentP/E)/(ForwardP/E)] TherearetwotypesofP/Eusedintheaboveformula,namelyCurrentP/EandForwardP/EForwardP/EForwardPEratiousestheforecastedearningspershareofthecompanyoverthenext12monthsforcalculatingtheprice-earningsratio.ForwardPEratioformula=Pricepershare/Projectedearningspershare readmore. CurrentP/E Thisprice-earningsratioPrice-earningsRatioThepricetoearnings(PE)ratiomeasurestherelativevalueofthecorporatestocks,i.e.,whetheritisundervaluedorovervalued.Itiscalculatedastheproportionofthecurrentpricepersharetotheearningspershare.readmoreusestheearningsforthepasttwelvemonths.Thus,thecurrentmarketpriceisdividedbytheaverageearningsofthelasttwelvemonths. ForwardP/E IntheForwardP/Eratio,theestimatedearningsEstimatedEarningsEarningsEstimateistheprojectionofearningofanentityforagivenperiod.Futureprojects,cashflows,marketconditions,andseveralotherfactorsareconsideredincalculatingthisestimate.readmoreofthenexttwelvemonthsareconsidered.Theratioiscalculatedbydividingthemarketpricebyaverageestimatedearningsofthenexttwelvemonths. Youarefreetousethisimageonyourwebsite,templatesetc,PleaseprovideuswithanattributionlinkHowtoProvideAttribution?ArticleLinktobeHyperlinkedForeg:Source:PriceTarget(wallstreetmojo.com) Example Astockofacompanyistradingat$80currently.Thecurrentearningspershareare$2.However,theestimatedearningspershareEarningsPerShareEarningsPerShare(EPS)isakeyfinancialmetricthatinvestorsusetoassessacompany'sperformanceandprofitabilitybeforeinvesting.Itiscalculatedbydividingtotalearningsortotalnetincomebythetotalnumberofoutstandingshares.Thehighertheearningspershare(EPS),themoreprofitablethecompanyis.readmoreare$2.5. Solution CurrentP/E=80/2=$40ForwardP/E=80/2.5=$32 CalculationofPriceTarget =80*(40/32)=$100 PriceTargetvsFairValue Apricetargetisanestimationofthepriceatwhichtheinvestorsareexpectedtobuyorsellaparticularstock.Itdoesn’treflecttheactualworthofthestock.Itwillbeusedbytheinvestorstodecidewhetheritwillbeappropriatetobuyorsellthestockbasedonthecurrentmarketpriceofthestock,ortheinvestorcanwaittotakehisposition. Ontheotherhand,thefairvalueofastockreflectstheintrinsicvalueofthestockoractualworthofthestockinotherwords.Ithelpstheinvestortodecidewhetherastockisovervaluedorundervalued.Basedonthisvaluation,aninvestorcandeterminewhetheritisagooddealtobuyorsellthestockornotregardingthecurrentmarketpriceandfairvalue. Advantages Pricetargethelpsaninvestortodecidewhetherheshouldholdthestockinexpectationsofanincreaseinfutureprice,orheshouldselltheshareasthesharehasreacheditstargetalready.Ithelpstheinvestorstodecidetherighttimetoexitorenterthemarket. Disadvantages Itisbasedontheestimatesofthefutureprice-earningsratio,whichinturnmeansitdependsonestimatesoffutureearnings.Itisdifficulttopredictfutureearningsaccurately.Thus,thetargetpriceissubjecttothelimitationthattheestimatesmaynotbeaccurate,andtheactualpricemayturnouttobedifferentthanthetargetprice,whichinturnwillaffectthestrategyoftheinvestor.Itinvolvesexpertprediction,andthus,anindividualinvestormaynotbeabletodothecalculationshimselfandwillneedtodependonmarketexpertsonly. Conclusion Itisaconceptusedbythemarketanalystswhokeepawatchonthestockofthecompanyandanalyzesvariousfactorsaffectingitsprice,itspriceearningratio,andsoon.Theymakeuseofpricetargettogiveopinionsfordifferentstockpositions. RecommendedArticles ThisarticlehasbeenaguidetoPriceTargetanditsdefinition.Herewediscussanexampleofapricetargetalongwithitsformula,advantages,disadvantages,anditsdifferencesfromfairvalue.Youmaylearnmoreaboutfinancingfromthefollowingarticles– HowdoestheStockMarketWork?WhatisMarketPrice?BooktoMarketRatioCalculationAuctionMarketEconomicValueAdded(EVA) PrimarySidebar GetFREEAccessto500+VideoTutorials SubscribetoYoutubeNow! 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