Stock valuation tools for private investors

Stock Valuation Tools

Price is what you pay and value is what you get. Finding a well-run profitable business with good long-term prospect is not enough. You need to know how much you should be paying for it so you can be certain to make a profit from investing in the stock.

Shrew investors often make money on their investments at the point of buying and not at the point of selling. When you buy a stock at a good price with a reasonable margin of safety you know, with some certainty, that you will make a profit from that investment. There are many methods to value a stock but each method is either based on asset or income. Ultimately based on the company’s current performance or expected future performance.

Ultra successful long-term investor like Warren Buffett views stock as a business and values stock like a business owner. You can use the available suite of valuation tools to appraise stock like a business owner with an intention to hold it for a number of years.

Valuation is not an exact science but a matter of informed opinion. Two investors using the same procedures and raw data can come up with two completely different results. There is always room for a different of opinion. There are usually several different valuation methods that can be used to value any particular company. While one may seem right on target and others may seem to be way out. That’s fairly normal. But you should use every method that seems a little bit appropriate.

By using a number of methods and thereby having a range of values to consider, you’ll get a good idea of what should be your bottom line and your upper limit. From a range of possible values you should try to identify a figure that seems to be best-fit to the situation and makes the most sense.

Stock relative valuation measures (market-based)

This tool generates various popular valuation measures based on the company’s current performance for you to find out the company’s fair market value, yields and payback period. It uses financial data not just from the last 12 months but over several years to give you a more accurate result. Start ...
Valuation using the Capitalization of Income Stream Method

This method can be used to value a business that generates significant before-tax profits. It takes the net income of the company and capitalizes it at an appropriate rate of return produced by other investments bearing a similar level of risk. The business is valued as an investment opportunity.

You can use this method when a business produces sufficient earnings to result in goodwill value over and above the market value of the company’s assets. Start ...
Valuation using the Capitalization of Cash Flow Method

This method values a company as it stands today. It assumes the business will continue to generate at least the minimum expected cash flow for the projected period. It takes the company’s free cash flow and capitalizes it at an appropriate rate of return to get the value of the business. The business is valued is an investment opportunity. Start ...
Valuation using the Future Sales Multiple Method

The company’ sales can tell you the size of the business and its position in the marketplace. Sales are generally more steady and easier to predict than profits and cash flows. This method can be used to value a loss-making business, a business with a strong brand and a business with consistent recurring sales. It’s based on the idea that an efficient operator can purchase the company at a depressed price relative to its sales level and make it more profitable through superior business practices and marketing techniques.

This method requires you to project the sales 5 to 10 years from now and multiplies the estimated sales by an appropriate price to sales ratio (PSR) to get the future value of the business. This value is then discounted back to present value using an appropriate rate of return to get the value of the business. Start ...
Valuation using the Future Earnings Multiple Method

This method uses an estimated growth rate for earnings and pay-out rate for dividends to forecast the future value of the business. The company’s future value is then discounted back to present value to get the value of the business. It values a business as an investment opportunity. Start ...
Valuation using the Return On Equity Method

This method values a business as an investment opportunity. It uses the company’s return on equity to project earnings and dividends 5 to 10 years into the future to get the future value of the company. This value is then discounted back to present value to get the value of the business. Start ...
Valuation using the Discounted Cash Flow Method

This method holds that a business is worth the present value of all cash flows flowing to its owner during the future plus the final company value that can be sold. It involves forecasting the company’s fee cash flows for the next 5 to 10 years and its terminal value, and sum up the present value of the cash flows and terminal value to get the intrinsic value of the business. You can use this method when a business produces regular operating cash flows with steady capital expenditures. Start ...
Valuation using the Ability To Pay Method

This method is based on an idea that the company’s own cash flow should be able to pay for its acquisition over a reasonable length of time with a healthy margin left for safety. It assumes a buyer purchases the business using mainly money borrowed from lenders. It involves calculating the cash flow available for debt payments after deducting 20% to 50% as safety margin. The value of the business is the maximum loan amount that this cash flow can support. Start ...
Valuation using the Excess Earnings Method

The Excess Earnings method assumes that a business is worth the market value of the tangible assets plus a premium for goodwill if earnings are high enough. It takes the market value of tangible assets and multiplies it by a rate of return appropriate to these assets to calculate the earnings attributable to tangible assets. The assets earnings figure is then deducted from the total earnings to get earnings attributable to intangible assets or goodwill. The excess earnings are capitalized at an appropriate rate of return to get the value of goodwill. The value of the business is the market value of tangible assets plus value of goodwill. Start ...
Valuation using Ben Graham Formula

The famous Ben Graham stock valuation formula for valuating growth stock with steady long-term earnings growth rate. Start ...
Valuation using sales and net profit margin

This method uses an estimated growth rate for sales, steady net profit margin and pay-out rate for dividends to forecast the future value of the business. The company’s future value is then discounted back to present value to get the value of the business. Start ...