What are Overvalued Stocks? Meaning, Signs & Examples

Overvalued stocks refer to stocks where the higher market price per share is above the current intrinsic value. This means the stock is worth more than what the market indicates it is. Speculation by many investors, too much optimism and very high growth projections lead to overvalued stocks. The investor pays a high price for a share due to high demand, resulting in a premium that is not justified by the company's earnings, strength of assets, or general financial standing. This article explains what are overvalued stocks in India. 

Why Do Stocks Become Overvalued? 

After understanding overvalued stocks meaning , let’s understand why stocks become overvalued: 

1. Market Hype and Speculation: If the stock has risen in price a lot due to media hype or speculation, and not because of its intrinsic worth. 
2. Optimism and Positive Sentiment by Investors: If there is any positive news about a trend stock and the company makes some positive announcements, and it has potential in the future, the stock is bought by many, and the price rises above its true intrinsic value. 
3. High Projections of Future Growth: Analysts tend to project high growth figures that appear unrealistic and subsequently lead to overvaluation of stocks, thus setting them up for a correction when the expectations fail. 

Key Indicators to Identify Overvalued Stocks 

Let’s now understand how to know if a stock is undervalued or overvalued. Analysts use several effective and reliable ways to check value in a stock and thus determine whether it is being overvalued. Commonly used indicators are as follows: 

1. Price/Earnings ratio (P/E)  This shows you how much each rupee earned by the company costs the investor. If the P/E is high compared to other stocks in that industry, then investors may have overhyped the ability of that company to generate earnings or profits. 
   For example, if the stock is trading at ₹900 when it’s earning ₹15, then the P/E ratio can be 60. 
    
2. Price-to-Earnings Growth Ratio The PEG ratio adjusts the P/E ratio by the growth of forecasted earnings. When PEG is considerably above 1, it may indicate that stock price gains are outpacing business growth. For instance, a company with a P/E of 30 and a corresponding earnings growth rate of 8% would show a PEG of 3.75. 
    
3. Relative Dividend Yield  This measures the return of dividends (as a percentage of the current market value) of a stock to that of the average dividend yield for a stock in the same industry. A lower yield can suggest that the price of a company's share has risen disproportionately to its dividend return. 
   For instance, if a stock offers dividends at a yield of 1%, but the average dividend yield for the rest of the index is 3.2%. 
    
4. Debt-to-Earning (D/E) Ratio The D/E ratio calculates how much debt the company uses compared to the equity of the shareholders. If a company has more debt than its relative peers & it’s at a high valuation, then the risk may be high.  For instance, an entity with ₹680 crore debt and ₹400 crore equity will have a D/E ratio of approx. 1.7. 
    
5. Return on Equity (ROE) The ROE is a measure of how well a company utilises the shareholders' equity to generate wealth for its shareholders. A low ROE and a stock with a high price may indicate that the stock is overvalued.  For example, a company with ₹750 in shareholders' equity and earning a profit of ₹55 would have an ROE of less than 8%. 
    
6. Earnings Yield  Earnings yield is the reverse of the P/E ratio and measures the return of earnings from all the company’s earnings. A low yield indicates that the price may be high. Suppose a company has an EPS of ₹10 and a market price of ₹700, giving an approximate earnings yield of 1.4%. 
    
7. Current Ratio The current ratio measures a company's ability to pay its short-term debts. A high current ratio means the company has many unproductive assets, whereas the valuation continues to rise. Let's assume that the present value of current assets is ₹1,500 crore and the present value of liabilities at this stage is ₹500 crore, thus raising the ratio to 3. 
    
8. P/B Ratio  The price-to-book ratio compares a company's current price against its current book value. P/B ratios higher than 1 usually indicate that investors are being overly optimistic about their expectations for future growth.  If the price for a stock is ₹620 and it has a book value of ₹280, then the P/B ratio will be 2.  

Notable Example of an Overvalued Stock 

As of 19 September 2025, Adani Enterprises Ltd was considered overvalued because it was trading at a P/E ratio of 85.60, an EV/EBITDA of 26.99, and a price-to-book value of 5.79. All are significantly above their industry peers. 

This comes from a market valuation report that compares key ratios with peers like Tata Chemicals and some other benchmarks to confirm their overvaluation. 

What Overvalued Stocks Mean for Investors 

Here is what an overvalued stock means for buyers and sellers: 

For buyers: 

• Risk of falling price 
• Lower margin of safety 
• Investments depend on the company continuing to grow. 

For sellers: 

• Overvaluation provides an opportunity to profit. 
• Lower risk of loss because the stock price is already high 
• Sellers can sell or rebalance the stock.  

Understanding overvalued stocks is crucial to making disciplined long-term investment decisions. 

Advantages & Disadvantages of Investing in Overvalued Stocks 

The following table highlights the advantages and disadvantages of overvalued stocks 

Disclaimer: All investments are subject to market risks, economic conditions, regulatory changes, and other external factors. Returns are not guaranteed and may vary based on market performance and investment tenure. Investors should assess their risk tolerance and financial objectives, conduct their own research, and consult a qualified financial advisor before making any investment decisions. 

Conclusion 

Overvalued stocks are those that are trading at prices higher than their actual value, mainly because of high demand or overoptimism about the stock’s growth potential. However, the process of identifying overvalued stocks requires careful analysis and discipline in stock valuation principles. A long-term investor should not make emotional decisions but rather focus on the key fundamentals for investment. Additionally, as markets continue to evolve, regular insights from a stock market trading app can help investors track valuations, manage risk, and make decisions.