Top 10 Valuation Formulas

Tacettin İKİZ · April 05, 2025, 11:47:54 AM

Top 10 Valuation Formulas
Learn how to analyze, value, and compare companies with these essential formulas

1. Price-to-Earnings (P/E) Ratio

Formula:
P/E Ratio = Market Price per Share / Earnings per Share

Purpose:
Shows how much investors are willing to pay for $1 of earnings.

Use Case:
Compare two cable manufacturers. One with P/E = 15, another P/E = 9 → The market sees more growth or reliability in the first.

2. Price-to-Book (P/B) Ratio

Formula:
P/B Ratio = Market Price per Share / Book Value per Share

Purpose:
Evaluates whether a stock is over- or undervalued relative to its accounting book value.

Tip:
Used in asset-heavy industries like manufacturing and utilities.

3. Enterprise Value (EV)

Formula:
EV = Market Capitalization + Total Debt – Cash and Equivalents

Purpose:
Reflects the true total value of a business, accounting for both debt and cash.

Use Case:
Used during mergers or takeovers. Debt-heavy companies may look deceptively cheap by market cap alone.

4. EV / EBITDA Ratio

Formula:
EV/EBITDA = Enterprise Value / Earnings Before Interest, Taxes, Depreciation, and Amortization

Purpose:
Used to assess profitability and compare across capital structures.

Benchmark:
Generally, 6–10 is considered normal across sectors.

5. Earnings Per Share (EPS)

Formula:
EPS = (Net Income – Preferred Dividends) / Average Outstanding Shares

Purpose:
Measures how much profit is allocated to each share.

Tip:
Higher EPS often leads to higher stock value, especially in growth companies.

6. Weighted Average Cost of Capital (WACC)

Formula:
WACC = (E/V) × re + (D/V) × rd × (1 – Tc)

Purpose:
Represents the firm's overall cost of capital from equity and debt.

Use Case:
Used as the discount rate in DCF valuations.

7. Discounted Cash Flow (DCF)

Formula:
DCF = ∑ (Cash Flow / (1 + Discount Rate)ⁿ)

Purpose:
Estimates today's value of future expected cash flows.

Use Case:
Used by investors for asset valuation and acquisition decisions.

8. Capital Asset Pricing Model (CAPM)

Formula:
Expected Return = Risk-Free Rate + β × (Market Return – Risk-Free Rate)

Purpose:
Used to determine required return given an asset's risk level (beta).

Tip:
Helps compare investment choices under similar conditions.

9. Dividend Yield

Formula:
Dividend Yield = Annual Dividend per Share / Market Price per Share

Purpose:
Shows cash return rate on your investment, excluding capital gains.

Investor Tip:
Used for stable, income-generating investments.

10. Return on Equity (ROE)

Formula:
ROE = Net Income / Shareholder's Equity

Purpose:
Indicates how efficiently a company uses equity to create profits.

Tip:
Higher ROE = higher efficiency, but check if it's boosted by leverage.

When to Use Which?

📈 DCF & WACC → For long-term value forecasting
📊 P/E, P/B, EV/EBITDA → For relative valuation across peers
💸 EPS, ROE, Dividend Yield → For profitability and income analysis
⚖️ CAPM → For adjusting required returns based on risk

Master these 10, and you'll see through the numbers into the business reality.

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Top 10 Valuation Formulas

Tacettin İKİZ