Stock Valuation Techniques

JWI 531 Financial Management II, 4/21/13

Stock valuation methods:

1. Earnings based valuation:
   Earnings per share (EPS)
   Price to Earnings (P/E)***
   Price to Earnings Growth (PEG)

   *** P/E = share price divided by earnings per share = market capitalization divided by net income

2. Revenues based models: Price to Sales ratio (P/S)

3. Cash Flow based model:
  Cash Flow(EBITDA) - Earnings before interest, tax, depreciation, amortization
  Discounted Cash Flow (DCF)
  Economic Value Added (EVA)
  Price to Cash Flow ratio (P/CF)
  Price to Free Cash Flow (P/FCF)

4. Equity based valuation:Price to Book value ratio (P/BV)
- Look for discrepancy between what the company owns vs what the company is selling for in the market
- aggressive investors identify undervalued assets on the books of a firm, acquire controlling stake, break up the firm, sell it piece by piece, force market to revalue assets individually

Dr DP