Value funds identify undervalued stocks by looking for companies whose market prices appear lower than their underlying business value. Fund managers generally use fundamental analysis to estimate what a company may be worth and then compare that assessment with its current share price.

One common approach is examining financial ratios. The price-to-earnings ratio can help managers compare a company's share price with its earnings, while the price-to-book ratio compares the market value with the company's net assets. Other measures, such as price-to-cash-flow, dividend yield, and enterprise value relative to earnings, may also be considered. However, no single ratio is enough to determine whether a stock is genuinely undervalued.

Value fund managers also study a company's financial statements, including revenue, earnings, cash flow, assets, liabilities, and debt. They may look for businesses with stable finances, strong cash generation, established operations, or potential for improving profitability that the market price may not fully reflect.

Qualitative factors are important as well. Managers may examine a company's competitive position, management quality, industry conditions, business model, and future growth opportunities. They may also consider whether temporary problems, negative sentiment, or broader market conditions have pushed a company's share price below what they believe is its reasonable value.

The goal is generally to purchase shares when the estimated intrinsic value is meaningfully above the market price, creating a potential margin of safety. However, a low share price does not automatically mean a stock is undervalued. Some companies are inexpensive because their fundamentals are deteriorating. Therefore, value fund managers combine valuation measures with financial and business analysis when selecting potential investments.