Use These 3 Metrics to Find Undervalued Stocks

Being able to find and invest in undervalued stocks is a great ability to have as an investor. Great companies can often fly under the radar or be underpriced by the market, and being able to identify those can pay off big with returns -- just ask Warren Buffett, who's made a fortune finding undervalued companies. If you're looking to find undervalued companies, using these three metrics will help you.

There aren't too many metrics more commonly used to determine whether a stock is undervalued or overvalued than the P/E ratio. The P/E ratio lets you know how much you're paying per share for $1 in earnings. To find the P/E ratio, simply divide a company's share price by its annualized earnings per share (EPS), which is its net income divided by outstanding shares.

If a company has $100 million in annual net income with 50 million outstanding shares, its EPS would be $2. If its share price is $50, its P/E ratio would be 25. This essentially means you're paying $25 per $1 per year in earnings.

Source Fool.com