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Price/Fair Value Ratio

Jan 25, 2024

What does the term “price/fair value ratio” mean?

The price/fair value ratio for stocks helps investors determine whether a stock is trading at, below, or above its fair value estimate, as determined by Morningstar's equity analysts. For stocks, this ratio is calculated by using the price and fair value estimate as of most recent market close day.

The price/fair value ratio tells whether an investment is currently over-, under-, or fairly valued, according to our analysts' fair value estimates for the underlying components as calculated at the most recent market close.

All stocks under coverage by Morningstar's equity analyst team receive a fair value estimate; the analysts forecast a company's future cash flows to arrive at an estimate of the company's intrinsic worth.

If the fair value estimate for the stock, based on the analysts' estimate of the company's intrinsic worth and the number of shares outstanding, is $100 per share but the stock is trading at only $90 per share, then its price/fair value ratio is 0.90. If the stock is trading at $110 per share, its price/fair value ratio would be 1.1. A price/fair value ratio below 1 suggests the stock is trading at a discount to its fair value, while a ratio above 1 suggests it is trading at a premium to its fair value.

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