Stock valuation is the process of determining the current worth of a company and its stock. It's a crucial step for investors to decide whether a stock is overvalued, undervalued, or fairly priced. By estimating a stock's intrinsic value, investors can make more informed decisions and aim for better returns.
The Gordon Growth Model (Dividend Discount Model)
The calculator above primarily uses a simplified version of the Gordon Growth Model (GGM), which is a variation of the Dividend Discount Model (DDM). The GGM assumes that dividends will grow at a constant rate indefinitely. The formula to calculate the intrinsic value (P0) of a stock is:
P0 = D1 / (k - g)
Where:
P0 = The intrinsic value of the stock today.
D1 = The expected dividend per share in the next period (Year 1).
k = The required rate of return (discount rate) for the investor.
g = The constant growth rate of dividends in perpetuity.
How the Calculator Works:
This calculator simplifies the calculation by using Earnings Per Share (EPS) and the current share price, and then derives an implied growth rate and discount rate. It can also work in reverse or provide an estimated intrinsic value based on expected future earnings growth.
Simplified Intrinsic Value Calculation (forward-looking, based on earnings):
A common approach to estimate intrinsic value uses a P/E ratio combined with expected future earnings. While the GGM is dividend-focused, we can adapt the concept or use a simpler model.
For a simplified valuation, we can calculate an implied forward P/E ratio if we assume the current price is fair, or estimate future value.
Our Calculator Focuses On:
The calculator takes the Current Share Price, Earnings Per Share (EPS), an assumed Expected Annual Growth Rate (g), and a Required Rate of Return (k) to estimate a fair value. It primarily uses the principle behind the GGM for its logic:
If we assume the company pays out all earnings as dividends (a strong assumption, but illustrative), then D1 would be EPS * (1 + g). However, companies rarely pay out 100% of earnings. A more direct approach is to consider the relationship between EPS and growth.
The calculator calculates an Estimated Intrinsic Value using a formula akin to the GGM, but it uses the provided inputs directly. A common valuation metric is the Price-to-Earnings (P/E) ratio: P/E = Price / EPS.
This calculator calculates an estimated intrinsic value that reflects the relationship between current price, expected growth, and required return. If the calculated intrinsic value is higher than the current share price, the stock may be considered undervalued. If it's lower, it might be overvalued.
Example Calculation Logic (Illustrative, as the exact implementation can vary):
If we project the EPS forward one year: EPS_next_year = EPS * (1 + g/100).
Then, a simplified intrinsic value might be estimated by applying a forward P/E ratio derived from the discount rate and growth rate: Forward P/E = 1 / (k/100 - g/100). This implies a value of Estimated Value = EPS_next_year * Forward P/E.
The calculator combines these principles to provide a single "Estimated Intrinsic Value".
Use Cases:
Investment Analysis: Help investors determine if a stock is a good buy.
Financial Modeling: Integrate into broader financial models for company valuation.
Educational Purposes: Demonstrate the impact of growth and risk on stock value.
Important Considerations:
The Gordon Growth Model and similar methods work best for mature, stable companies with consistent dividend (or earnings) growth.
Assumptions about growth rate (g) and discount rate (k) are critical and can significantly impact the valuation.
This calculator provides an estimate; actual market prices are influenced by many factors beyond these fundamental inputs.
Ensure inputs like EPS and growth rates are realistic and based on thorough research.
Example:
Let's say a stock is currently trading at $150.75. Its Earnings Per Share (EPS) is $5.20. You expect the company's earnings to grow at an annual rate of 8.5%, and your required rate of return (discount rate) is 12.0%.
Current Share Price: $150.75
Earnings Per Share (EPS): $5.20
Expected Annual Growth Rate (g): 8.5%
Required Rate of Return (k): 12.0%
Using the calculator with these inputs, you can see the estimated intrinsic value. If the estimated intrinsic value is, for example, $180.00, the stock might be considered undervalued relative to your assumptions.
function calculateValuation() {
var currentSharePrice = parseFloat(document.getElementById("currentSharePrice").value);
var earningsPerShare = parseFloat(document.getElementById("earningsPerShare").value);
var growthRate = parseFloat(document.getElementById("growthRate").value);
var discountRate = parseFloat(document.getElementById("discountRate").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
// Input validation
if (isNaN(currentSharePrice) || isNaN(earningsPerShare) || isNaN(growthRate) || isNaN(discountRate)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (growthRate >= discountRate) {
resultDiv.innerHTML = "Error: Growth rate must be less than the discount rate for a valid valuation.";
return;
}
if (earningsPerShare <= 0) {
resultDiv.innerHTML = "Error: Earnings Per Share must be a positive value.";
return;
}
if (currentSharePrice <= 0) {
resultDiv.innerHTML = "Error: Current Share Price must be a positive value.";
return;
}
// Convert percentages to decimals
var g = growthRate / 100;
var k = discountRate / 100;
// Calculate components for valuation
// Assuming D1 is represented by EPS * (1+g) for simplicity in this model context
// A more direct GGM uses dividends D1 = D0*(1+g). If we don't have D0, we can use EPS * payout_ratio.
// For this calculator, we'll use a simplified GGM-like intrinsic value calculation based on EPS.
// Estimate an intrinsic value based on a common forward P/E calculation.
// Forward P/E implies Value = EPS_forward * Target_PE
// Target_PE can be approximated as 1 / (k – g) for GGM logic
var epsForward = earningsPerShare * (1 + g);
var targetPE = 1 / (k – g);
var estimatedIntrinsicValue = epsForward * targetPE;
var currentPE = currentSharePrice / earningsPerShare;
var fairPE = estimatedIntrinsicValue / earningsPerShare; // This essentially is the targetPE calculated above
resultDiv.innerHTML = "$" + estimatedIntrinsicValue.toFixed(2) + "Estimated Intrinsic Value";
// Optional: Display comparison metrics
var comparisonHtml = "
";
comparisonHtml += "Current P/E Ratio: " + currentPE.toFixed(2) + "";
comparisonHtml += "Estimated Fair P/E Ratio: " + fairPE.toFixed(2) + "";
if (estimatedIntrinsicValue > currentSharePrice) {
comparisonHtml += "The stock appears to be undervalued.";
} else if (estimatedIntrinsicValue < currentSharePrice) {
comparisonHtml += "The stock appears to be overvalued.";
} else {
comparisonHtml += "The stock appears to be fairly valued.";
}
comparisonHtml += "