Valuation Formulas

The formulas we offer are described below. All users can access our Standard Valuation, Tobin’s Q and Net-Net Methods. Members can access all formulas, including Valuator™, Valuation By Multiples and our RoboValuator and RoboStandard Stock Screeners.

Valuator™

Valuator™ provides both an internal and external valuation of your target company by combining the Standard Valuation with Valuation By Multiples. Standard Valuation, the internal approach, calculates intrinsic value by using the past three year’s financial statement results. Net Income is adjusted by adding Depreciation and subtracting Capital Expenditures, and the result is discounted by the average investment grade corporate bond yield. The resulting intrinsic value is combined with the intrinsic value calculated in Valuation By Multiples, the external approach. Valuation By Multiples compares the financial ratios of selected comparable companies to the ratios of your target company. Ratios used in this approach include Price/Earnings, Price/Sales and Price/Book Value, among other ratios. This method determines how under- or overvalued your target company is compared to it’s industry and is one of the most widely used methods of valuation.

Both of these intrinsic values are combined to present one robust valuation for your target company. Our academic and real-world investing experience has proven the Valuator™ to be the most accurate valuation tool we offer.

Valuation By Multiples

Valuation By Multiples provides an external valuation of your target company. Valuation By Multiples compares the financial ratios of selected comparable companies to the ratios of your target company. Ratios used in this approach include Price/Earnings, Price/Sales and Price/Book Value, among other ratios. This method determines how under- or overvalued your target company is compared to it’s industry and is one of the most widely used methods of valuation.

Standard Valuation

Standard Valuation provides an internal valuation of your target company. This formula calculates intrinsic value by using the past three year’s financial statement results. Net Income is adjusted by adding Depreciation and subtracting Capital Expenditures, and the result is discounted by the average investment grade corporate bond yield. This formula uses Net Income from Continuing Operations in order to prevent one-time items, such as accounting changes and discontinued operations, from adversely affecting the valuation results.

Tobin’s Q

Tobin’s Q compares the market value of the company with the value of the company’s total asset value.

Tobin’s Q = Total Market Value of Firm / Total Asset Value

Tobin’s Q is technically not a valuation formula, but instead a valuation indicator. A low Q (between 0 and 1) means that the cost to replace the company’s assets is greater than the value of its stock. This implies that the stock is undervalued. Conversely, a high Q (greater than 1) implies that the company’s stock is more expensive than the replacement cost of its assets, which implies that the stock is overvalued. This formula is useful for finding and confirming undervalued stocks.

Net-Net Methods

The Graham Net-Net Method (Brandes Method) calculates intrinsic value as follows:

Intrinsic Value = (2/3) x (Total Current Assets – Total Current Liabilities)

The Oppenheimer Net-Net Method calculates intrinsic value as follows:

Intrinsic Value = [(1/3) x Fixed Assets] + (Total Current Assets – Total Current Liabilities)

The Graham Method is a classic valuation formula first revealed in Graham and Dodd’s 1934 value investing classic Security Analysis. This formula was popularized by Charles Brandes’ epic Value Investing Today, which is why even today some investors refer to the Graham Method as the “Brandes Method”. The Oppenheimer Method is another classic valuation formula popularized by successful value investors. Both of these formulas are referred to as “net-net” methods due to both formulas providing valuations based on net current assets. These formulas were useful back when financial information was not as readily available and net-nets were much more prevalent in the market. These special occurrences are now much more difficult to identify in the market, but Graham and Dodd’s theories on valuing a company based on assets remain useful.

User Submitted Formulas

Investing formulas submitted by our members. Feel free to browse through these and test them out – you may find a few that supplement your current approach. Only valid formulas are published on our website; our team tests each submission to ensure that an intrinsic value can be calculated. However, we do not guarantee the accuracy of user submitted formulas, so use these at your own risk.