Stock Valuation Calculator
Use free cash flow, stock-based compensation, a valuation multiple, and adjusted shareholders’ equity to quickly calculate a stock’s estimated value.
Enter the company’s free cash flow in USD billions.
Enter the company’s stock-based compensation in USD billions.
Enter the valuation multiple you consider reasonable for the company’s adjusted free cash flow.
Enter the adjusted shareholders’ equity in USD billions.
Stock Valuation Result (USD Billions)
Stock Valuation Formula
(Free Cash Flow − Stock-Based Compensation) × Valuation Multiple + Adjusted Shareholders’ Equity
How to Calculate Stock Value
1. Calculate Adjusted Free Cash Flow
First, subtract stock-based compensation from free cash flow to calculate adjusted free cash flow.
Adjusted Free Cash Flow = Free Cash Flow − Stock-Based Compensation
2. Calculate FCF Valuation
Next, multiply adjusted free cash flow by the valuation multiple to calculate the FCF-based valuation.
FCF Valuation = Adjusted Free Cash Flow × Valuation Multiple
3. Calculate Estimated Stock Value
Finally, add adjusted shareholders’ equity to the FCF valuation to calculate the estimated stock value.
Estimated Stock Value = FCF Valuation + Adjusted Shareholders’ Equity
Why Is Stock-Based Compensation Deducted?
Stock-based compensation (SBC) does not usually require a direct cash payment when the compensation is granted. However, companies may compensate employees with shares or other equity-based instruments, which can dilute existing shareholders. Therefore, this stock valuation calculator deducts stock-based compensation from free cash flow when calculating adjusted free cash flow.
What Is a Valuation Multiple?
A valuation multiple represents how much investors are willing to pay for each unit of a company’s adjusted free cash flow. For example, if a company’s adjusted free cash flow is $100 million and the valuation multiple is 20x, the FCF valuation would be $2 billion.
The appropriate valuation multiple can vary significantly between companies. Factors such as growth rate, profitability, competitive advantages, industry characteristics, and financial risk can all affect a reasonable valuation multiple.
What Is Adjusted Shareholders’ Equity?
Adjusted shareholders’ equity is the value of shareholders’ equity after making adjustments based on the company’s actual assets and liabilities. Investors can determine which assets or liabilities should be adjusted according to their own valuation methodology.
Stock Valuation Example
Suppose a company has $1 billion in free cash flow, $100 million in stock-based compensation, a valuation multiple of 20x, and $5 billion in adjusted shareholders’ equity.
($1 billion − $100 million) × 20 + $5 billion
The adjusted free cash flow is $900 million. The FCF valuation is $18 billion. After adding $5 billion in adjusted shareholders’ equity, the estimated stock value is $23 billion.
What Should You Consider When Using a Stock Valuation Calculator?
There is no single correct answer when it comes to stock valuation. The estimated value can be affected by free cash flow, stock-based compensation, the valuation multiple, and adjusted shareholders’ equity.
Therefore, the result from this stock valuation calculator should be used as a valuation reference rather than a prediction of the stock’s future market price.
Frequently Asked Questions (FAQ)
1. How was this valuation method developed?
This is an experience-based valuation formula. It primarily relies on an investor’s understanding of the company and investment experience to determine an appropriate FCF valuation multiple, while also making adjustments to shareholders’ equity to estimate the overall value of the company.
2. Can a company still be valued when its free cash flow is negative?
When a company’s free cash flow is negative, this valuation method may no longer be effective. It may not adequately reflect certain high-growth companies that require significant capital expenditures, potentially causing investors to miss investment opportunities. Tesla is one example.
3. What types of companies is this valuation method suitable for?
I believe this valuation method has a relatively broad range of applications. It is more suitable for companies with business models that are relatively easy to understand, stable growth, and mature free cash flow generation.
However, it may not be suitable for companies experiencing explosive growth, such as NVIDIA, and could cause investors to overlook high-growth investment opportunities.
4. What is the difference between this Stock Valuation Calculator and DCF (Discounted Cash Flow) valuation?
I prefer a simpler and more direct approach. In my view, the difference is not particularly significant.
Both methods rely on an investor’s experience and judgment to make certain assumptions about a company. In other words, the better an investor understands valuation and investing, the more reliable the valuation may be. If an investor’s assumptions or judgment are less accurate, the resulting valuation may also become less reliable.
5. What does “stock valuation” mean here?
In this calculator, stock valuation refers to the estimated total equity value of the company, not the price per share.
Users should be aware of this distinction when interpreting the valuation result.