Stock Valuation Methods to Know for Corporate Finance Analysis

Understanding stock valuation methods is key in Corporate Finance Analysis and Investor Relations. These techniques help assess a company's worth, guiding investment decisions and communication with stakeholders. Key methods include DCF, P/E, and comparable company analysis, among others.

1. Discounted Cash Flow (DCF) Model

   • Estimates the value of an investment based on its expected future cash flows.
   • Cash flows are projected and then discounted back to their present value using a discount rate.
   • Useful for assessing the intrinsic value of a company, independent of market conditions.

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

   • Compares a company's current share price to its earnings per share (EPS).
   • Indicates how much investors are willing to pay for each dollar of earnings.
   • A higher P/E ratio may suggest that the market expects future growth, while a lower ratio may indicate undervaluation.

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

   • Compares a company's market value to its book value (assets minus liabilities).
   • A P/B ratio under 1 may indicate that the stock is undervalued relative to its assets.
   • Useful for evaluating companies with significant tangible assets, such as financial institutions.

4. Dividend Discount Model (DDM)

   • Values a stock based on the present value of its expected future dividends.
   • Assumes that dividends will grow at a constant rate indefinitely.
   • Particularly relevant for companies with a stable dividend payout history.

5. Comparable Company Analysis

   • Involves evaluating a company's value relative to similar companies in the same industry.
   • Uses valuation multiples (like P/E, EV/EBITDA) to derive a fair value estimate.
   • Helps investors gauge market sentiment and competitive positioning.

6. Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

   • Compares a company's total enterprise value (market cap plus debt minus cash) to its earnings before interest, taxes, depreciation, and amortization (EBITDA).
   • Useful for assessing a company's overall financial performance and valuation.
   • A lower EV/EBITDA ratio may indicate a more attractive investment opportunity.

7. Price-to-Sales (P/S) Ratio

   • Compares a company's stock price to its revenue per share.
   • Useful for evaluating companies that may not yet be profitable but have strong sales growth.
   • A lower P/S ratio can indicate undervaluation, especially in growth sectors.

8. Free Cash Flow to Equity (FCFE) Model

   • Calculates the cash available to equity shareholders after all expenses, reinvestments, and debt repayments.
   • Provides insight into a company's ability to generate cash and return value to shareholders.
   • Useful for valuing companies with fluctuating capital expenditures.

9. Gordon Growth Model

   • A specific type of DDM that assumes dividends will grow at a constant rate.
   • Calculates the present value of an infinite series of future dividends.
   • Best suited for companies with stable and predictable dividend growth.

10. Residual Income Model

    • Values a company based on the income generated above the required return on equity.
    • Focuses on the profitability of a company after accounting for the cost of capital.
    • Useful for assessing companies that do not pay dividends or have irregular cash flows.