Valuation Methodology
Valuation Methodology
How our calculators estimate the intrinsic value of stocks and assets.
Discounted Cash Flow (DCF)
The DCF model estimates intrinsic value by projecting future free cash flows and discounting them back to present value using the Weighted Average Cost of Capital (WACC).
Key Components
- Free Cash Flow (FCF) - Cash generated after capital expenditures
- Growth Rate - Expected annual FCF growth rate during the projection period
- Terminal Value - Value of all cash flows beyond the projection period, typically calculated using the Gordon Growth Model or an exit multiple
- Discount Rate (WACC) - Blended cost of equity and debt, reflecting the risk of the investment
Dividend Discount Model (DDM)
The DDM values a stock based on the present value of its expected future dividend payments. Our calculators support both the simple Gordon Growth Model (constant growth) and multi-stage models with varying growth rates.
Gordon Growth Model
The simplest form of DDM assumes dividends grow at a constant rate forever. The formula divides the next expected dividend by the difference between the required rate of return and the growth rate.
Earnings Multiples
Relative valuation compares a company against peers using standardized metrics:
- P/E Ratio - Price relative to earnings per share
- EV/EBITDA - Enterprise value relative to earnings before interest, taxes, depreciation, and amortization
- P/B Ratio - Price relative to book value per share
- P/S Ratio - Price relative to revenue per share
Book Value & Net Asset Value
Our book value calculators use total assets minus total liabilities to determine net asset value. Per-share values are derived by dividing by shares outstanding. This approach is most relevant for asset-heavy businesses like banks and REITs.
Important Considerations
All valuation methods involve assumptions about the future which are inherently uncertain. Our calculators provide estimates based on user-supplied inputs and should be used as one of several tools in the investment decision process. We recommend using multiple valuation approaches and comparing results.