Looking for cheap stocks? These two simple formulas can help

In the same way people love to nab a bargain in the shops, there is real appeal in investing in a company on the cheap. But how do we identify value when it comes to the stock market.

Two simple formulas offer a good starting point – the price to earnings or PE ratio and price to book ratio. The PE is calculated by dividing the stock price by earnings per share. The price to book ratio is calculated by dividing the share price by book value per share. Book value being a company’s total assets minus its liabilities.

What does the PE tell you?

The UK’s largest stock by market value is pharmaceutical company AstraZeneca. Based on a price at the time of writing of £154.48, and 2026 earnings per share forecast from a consensus of analysts of £10.26, AstraZeneca has a forward PE ratio of 15.1 times.

Forecast earnings are often used instead of historic earnings to reflect the forward-looking nature of the stock market. It is worth pointing out that a low PE can signify a business in structural decline, so you need to look under the bonnet of the business to get a sense of whether earnings are growing and how the markets it operates in are performing.
 

Frasers is often considered a value stock due to its low PE and solid asset backing from its freehold property.
The low PE may also reflect investor caution around founder Mike Ashley’s large shareholding, his unconventional management style and the group’s high financial leverage.

Operationally, the business delivered 5% first half revenue growth to circa £2.6 billion and management guided for full year pre-tax profit between £550 million and £600 million. Strategically, Frasers is moving away from a discount model towards premium brands and deepening relationships with Nike, Adidas and Hugo Boss. 

Interestingly, three airlines feature on the screen which may reflect a belief that industry profits have peaked following the post-pandemic surge in travel and rising ticket prices.

The airline industry is notoriously cyclical and sensitive to changes in consumer demand and volatile oil prices. 
Value-focused fund manager Redwheel believes British airways-owner International Airline Group’s margins are sustainable due to structural cost improvements and the airline’s dominant position on the transatlantic route.

Advertising agency WPP saw its shares fall to all-time lows in 2026 reflecting a mixture of industry headwinds, poor execution and an existential threat from AI. Languishing on a low single-digit PE and a sub-£3 billion market value, the company is potentially vulnerable to a takeover.

Which UK stocks are trading at a discount to book value?

Price to book value used to be the gold standard of value investing when real tangible assets were more prominent on company balance sheets. 

Theoretically a price to book value below one indicates a potential bargain, but it could also signal that investors believe a company’s assets are impaired. Book value ignores intangible items like intellectual property, brand value and human capital. 
 

Pub group Young’s & Co recently announced a move to the main market from AIM, expected to happen in the second quarter of 2026. With a market value of £522 million, it will likely be eligible for FTSE 250 membership. Young’s is one of the few pub groups with a predominantly freehold estate (approximately 80%), all situated in desirable locations in London and the Southeast. 

Reported book value was £774 million at the end of fiscal 2025 (March) or £12.47 per share around a third below the current share price. The company maintains a progressive dividend policy, with the payout rising 6% to 23.06p per share in 2025, equating to a yield of close to 4%.

Barclays bank trades at a slight discount to tangible book value.  The bank achieved a return on tangible equity, a key metric in the banking sector, of 11.3% in 2025.The bank is targeting 14% on this measure by 2028 and plans to increase shareholder returns via further share buybacks and dividends. 

Housebuilder Barratt Redrow trades below the value of its tangible assets and has net cash sitting on the balance sheet. The company has confirmed it is on track to deliver £100 million cost savings by 2027 and is actively repurchasing shares.