Which Share Price Should You Use to Calculate Price Target Upside?
Calculate upside from a price target and reference price, and see how a different starting price changes the result. Distinguish upside from target probabilities, downside risk, and dividend yield.
Potential price upside is usually calculated by dividing the price target by the reference share price, subtracting 1, and multiplying by 100. It does not represent the probability of reaching the target or the likelihood of avoiding a loss.
Do not use the target as the denominator
If the reference share price is KRW 50,000 and the target is KRW 60,000, the difference is KRW 10,000. Upside uses the starting investment price of KRW 50,000 as its denominator, giving 20%. Dividing the difference by the KRW 60,000 target gives about 16.67%, which answers a different question. If a report uses the term 'gap ratio,' check its particular definition and formula. The sign and denominator may differ depending on whether it measures the actual price's distance from the target or the upside from a reference price to the target.
Use a consistent calculation basis
The share price in a report usually refers to a specified time and may differ from the price when you read it. If the price has already risen, remaining upside falls. When comparing an old target with a post-split price, adjust the price basis for the change in share count. For overseas stocks, also check the currencies of the target and current price, and the units for ordinary shares versus depositary receipts. If your decimals differ slightly from the original, first check for unrounded prices or different reference times rather than immediately assuming an error.
Find the information a large upside figure leaves out
The upside formula does not include the time needed to reach the target, losses along the way, or forecast uncertainty. A target based on stale, less realistic earnings estimates can still show large mathematical upside. Before ranking different stocks by upside, align their forecast horizons and valuation assumptions. Distinguish returns including dividends from price-only returns too. The same 20% means different things over a few months and over several years. To examine downside as well, you need a separate pessimistic scenario. High upside alone cannot establish a favorable balance between gains and losses.
Worked example
Hypothetical example: A target of KRW 72,000 and a report reference price of KRW 60,000 imply 20% upside. If the stock is KRW 64,000 when you read it, the result becomes 72,000 ÷ 64,000 − 1 = 12.5%. If the target later falls to KRW 66,000, upside from that same KRW 64,000 price is 3.125%. Record the original 20%, the 12.5% reflecting only the current price, and the 3.125% reflecting the new target separately. They describe different combinations of information, and none is a guaranteed return.
What to check
- Have you used the reference share price as the denominator?
- Have you checked the date of the report's share price?
- Are the split adjustments, currencies, and share types consistent?
- Have you avoided reading upside as a probability or an assured return?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.