Stock Price Charts

How do they figure out how to chart a stock's price in relation to its earnings?

if i saw a chart with a line graph of a stock's earnings and price for the past year or so. how would i know if the stock is overpriced or underpriced. basically what i'm saying is: the y-axes for the two variables are on different scales, how can i make them relate in a meaningful way. clarification: let's say the earnings line on a graph is way above the stock's price on the same exact graph. how do i know that that's because the stock is undervalued with relation to earnings or because the two scales on the y-axes are off. like in peter lynch's book he compares earnings and price on the same graph to make a decision on whether a stock's price is over or undervalued. how would i make a graph like that on my own??

Public Comments

1. Perhaps a bar graph could work nice. The total size of the graph can be the stock price, and the inner colored portion of the bars could be the EPS. However, you have to be careful with this view of a stock's value. A stock's value for most regular companies is composed of a stream of cash flows for close to 5 years, and a terminal value. The terminal value is the key part in this. The terminal value includes future plans that the company might have. In other words, expectations. Current earnings on the income statement do not reflect expectations. For this reason, the chart might not be an accurate representation of reality. Having said that. The easiest thing to do, if you are pressed with time, find some peer companies. These companies can be of roughly equivalent size and in the same industry. And do a comparison on how your company's value stand agains those.