Stock Valuation Calculator
Estimate the fair market price of a stock based on earnings and valuation multiples.
How to Calculate the Price of a Stock
Understanding how to calculate the price of a stock is a fundamental skill for any investor. While the market price is what you see on a ticker, the intrinsic value is what the stock is actually worth based on its underlying financial performance.
This calculator uses two primary methods to determine value:
- The P/E Multiplier Method: This takes the company's Earnings Per Share (EPS) and multiplies it by the Price-to-Earnings (P/E) ratio. It represents how much investors are willing to pay for every dollar of profit.
- Growth Projection: By factoring in an expected annual growth rate, we can estimate what the stock price might look like in the future if the company maintains its performance.
The Formula
The basic formula for current valuation is:
Stock Price = Earnings Per Share (EPS) × P/E Ratio
To calculate the future price based on growth, we use the compound growth formula:
Future Price = Current Price × (1 + Growth Rate)^Years
Key Terms Defined
Earnings Per Share (EPS): This is the portion of a company's profit allocated to each outstanding share of common stock. It is a direct indicator of profitability.
P/E Ratio: The Price-to-Earnings ratio measures a company's current share price relative to its per-share earnings. A high P/E might mean the stock is overvalued, or that investors expect high growth rates in the future.
Growth Rate: The percentage at which a company is expected to increase its earnings annually. This is often based on historical data or analyst estimates.
Example Calculation
Imagine "TechCorp" has an EPS of 4.00 and the industry average P/E ratio is 20. If you expect the company to grow at 8% per year for the next 5 years:
- Current Value: 4.00 × 20 = 80.00
- Future Value: 80.00 × (1 + 0.08)^5 ≈ 117.55
If the stock is currently trading at 70.00, it might be considered undervalued based on these metrics. Conversely, if it is trading at 100.00, it might be overvalued.