• If you are wondering whether Ally Financial's current share price lines up with its underlying value, this article walks through what the numbers are actually saying about the stock.
• The shares last closed at US$41.29, with returns of 8.7% over 1 year and 53.9% over 3 years. This is even though the stock has seen a 2.6% decline over 7 days, 5.3% over 30 days and 9.8% year to date.
• Recent attention on Ally Financial has focused on its role as a digital focused bank and auto lender, as investors weigh how its business model fits into a changing financial services sector. In this context, valuation has remained in the spotlight as the market reassesses what an online focused financial institution should be worth compared with traditional peers.
• On Simply Wall St's valuation checks, Ally Financial scores 5 out of 6 for potential undervaluation, which you can see in detail via its valuation score. Next we will walk through the usual valuation tools investors rely on, then finish with a way to put all those methods into a clearer big picture.

Approach 1: Ally Financial Excess Returns Analysis

The Excess Returns model looks at how much profit a company can generate above the return that equity investors typically require, and then capitalizes those “excess” profits into an estimated value per share.

For Ally Financial, the starting point is its book value of $42.70 per share and an average return on equity of 12.03%. Based on analyst inputs, the model uses a stable earnings figure of $5.90 per share, sourced from weighted future Return on Equity estimates from 9 analysts, and a stable book value of $49.07 per share, based on their book value estimates.

The cost of equity is set at $5.64 per share, so the model calculates an excess return of $0.26 per share. When those excess returns are projected forward and aggregated, the Excess Returns model arrives at an intrinsic value of about $52.27 per share.

Compared with the recent share price of US$41.29, this implies Ally Financial trades at roughly a 21.0% discount to the Excess Returns estimate, indicating the shares are currently undervalued on this measure.

Result: UNDERVALUED

Our Excess Returns analysis suggests Ally Financial is undervalued by 21.0%. Track this in your watchlist or portfolio, or discover 56 more high quality undervalued stocks.

Approach 2: Ally Financial Price vs Earnings

For a profitable business like Ally Financial, the P/E ratio is a useful way to see what you are paying for each dollar of earnings. It reflects how the market weighs the company’s earnings profile, so it is a simple but widely used check on valuation.

What counts as a “normal” P/E really depends on two things: growth expectations and risk. Higher expected earnings growth or lower perceived risk can support a higher P/E, while slower growth or higher risk typically mean a lower multiple is more reasonable.

Ally Financial currently trades on a P/E of 17.17x. That sits above the Consumer Finance industry average of 8.05x, yet below the peer group average of 46.77x. Simply Wall St’s Fair Ratio metric, which estimates an appropriate P/E based on factors such as earnings growth, profit margins, industry, market cap and company specific risks, points to a Fair Ratio of 18.90x for Ally.

This Fair Ratio can be more informative than a straight comparison with industry or peers because it adjusts for the company’s own characteristics rather than assuming all firms deserve the same multiple. With the current P/E of 17.17x sitting below the Fair Ratio of 18.90x, Ally Financial screens as undervalued on this metric.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Ally Financial Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, which are simply your story about a company tied directly to your own numbers for fair value, future revenue, earnings and margins, all kept in one place. A Narrative connects what you think is happening at Ally Financial to a full forecast and then to a fair value that you can compare with the current share price to help you decide whether the stock looks expensive or cheap on your assumptions. On Simply Wall St, Narratives sit inside the Community page and are designed so any investor can plug in assumptions without needing a spreadsheet, while the platform automatically keeps them up to date when new news or earnings arrive. For example, one Ally Financial Narrative on the platform currently assumes a fair value of US$37.00 at the cautious end of analyst targets, while another assumes US$56.49 at the higher end, showing how two investors can look at the same business, apply different views on growth, margins and risk, and reach very different conclusions about what the shares are worth.

Do you think there's more to the story for Ally Financial? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.