The Simple Way to Find Undervalued Stocks

A clear, beginner-friendly guide to identifying quality businesses using real examples and simple valuation checks.

Hello and welcome back to The Finance Lens!

You will notice something funny in the stock market: Everyone, from your neighbour to your office colleague to people on X, says the same thing:

“Buy undervalued stocks, yaar.”

But when you ask how to actually find one, suddenly the room goes quiet.

I have been through this confusion myself. Early in my investing days, I bought a stock just because someone said it was cheap. Later, I found out it was cheap for a very good reason—like a biscuit packet past its expiry date. After that, I promised myself I would never buy a stock unless I knew why it was undervalued.

Here is the simple method I started using. Nothing fancy. Anyone can follow it.

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Step 1: First, Check If the Business Itself Is Worth Your Time

Before doing any math, see if the company is even quality. Otherwise, valuation is like putting makeup on a brick.

Here are the 4 things I look for now (learned them the hard way):

1. Revenue & Profit Growing Consistently

Not one good year followed by three bad ones.
I just want steady, predictable progress.

2. ROCE Above 15%

When I first understood ROCE, it felt like I unlocked a cheat code.
It basically tells me: Is this company good at using money?

3. Low or Reasonable Debt

High-debt companies always made me nervous. One wrong quarter and boom—panic.

4. Cash Flow is Real

Profits can be managed. Cash cannot.
If cash flow is healthy, I sleep well.

If a company flunks these four, I do not bother valuing it.

Step 2: Then Look at the Simple Valuation Numbers

This part used to scare me, but it is honestly easier than it looks.

Here are the 3 things I check:

1. P/E Ratio

I compare:

• current P/E

• company’s own 5-year average

• industry average

If today’s P/E is much lower, it might be undervalued… or the market is reacting to some bad news. So I double-check.

2. P/B Ratio

Useful when looking at banks, NBFCs or asset-heavy businesses.

3. Basic Earnings Projection

I used to think you needed Excel magic for this.
Now I just estimate the next 3–5 years of earnings and slap on a reasonable P/E.
That’s it. No rocket science.

Step 3: A Simple Example (Like I would Explain to a Friend)

Let’s take a random company—ABC Industries.

Quality Check

• Revenue growing 10–12% every year

• ROCE around 18%

• Low debt

• Cash flow stable

At this point, I am interested.

Valuation Check

• Price today: ₹500

• EPS: ₹25

• P/E = 20

Now compare:

• Company’s 5-year average P/E = 28

• Industry P/E = 30

So the company is clearly trading at a discount. But is it justified?
Let’s do the final step.

Step 4: Estimate Fair Value (Don’t Overthink This)

Assume earnings grow at 10% per year.

Future EPS after 3 years = ₹33.25

Even if I use a conservative P/E of 25:

Fair Value = 33.25 × 25 = ₹831

CMP is ₹500.
Fair value looks like ₹831.
That’s a big gap.

This is what real undervaluation feels like.

What I Learned Over the Years

Cheap stock does not mean undervalued.
And expensive-looking stock does not always mean overvalued.

The real formula that works for me now is:

Quality first → Valuation second

It is like choosing a life partner—you do not start with the cost of the wedding.
You see the person first.

Final Thought

Finding undervalued stocks is not about memorising formulas.

It is more about asking:

“Is this a genuinely good business, and is the market sleeping on it right now?”

If the answer to both is yes, I usually trust my homework.

And honestly, once you get comfortable with revenue growth, ROCE, debt, cash flow, and P/E comparisons, the whole process becomes surprisingly natural—almost like reading the personality of a company.

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Disclaimer: I am sharing what I have learned, not telling you what to buy. Please research independently or speak to a financial advisor before investing.

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