In this article, we explore how to calculate a stock price in several ways, including:
- market capitalization (also known as market capitalization)
- PE ratio (and other 'multiples')
- dividend, i
- Free cash flow
Let's get into it!
How to calculate share price
However, before we get into the details of calculating a share price, let's get this straightInis the share price
What is the share price?
Share price refers to the current market price of a stock or share. It is the price at which the sharesfor uat the fair.
There are several ways to calculate stock price, so let's now look at the different ways.
How to calculate stock price based on market capitalization
We can calculate the share price by simply dividing the market capitalization by the number of shares outstanding.
In other words, we can say that the share priceis calculated as...
Now let's thinkbecausewe can calculate this way.
OpMarket Capitalization (also known as Market Capitalization)reflects market valuecapitalbusinesses. It is calculated as…
Whererefers to the share price, ireflects the total number of shares outstanding.
We can rearrange the market capitalization equation to get an expression for stock price.
This is done by dividing both sides of the equation by, which resulted in...
Okay, now you know how to calculate the price of a stock based on market capitalization. Now let's take a different approach and explore how to calculate a stock price using the PE ratio and other multiples.
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How to Calculate Stock Price Based on PE Ratio (and Other Multiples)
Described as "investor's favorite index",P/E ratio (or price-to-earnings ratio)It is one of the most popular ratios among investors. The PE ratio is calculated as…
Wherereflects the share price ireflects earnings per share.
We use an approach similar to the one we used when we learned how to calculate the price of a stock based onMarket capitalization, we can rearrange the PE ratio equation to obtain an expression for stock price.
This is done usingby multiplicationboth sides forSo we have…
The same goes for other multiples or ratios. For example, if we were thinking about how to calculate a share price based on an earnings multiple, we would start by determining the relevant financial ratio based on earnings.
Consider the price-to-sales ratio (PS ratio), estimated as…
Herereflects the share price as before andshowsprofit per share.
Now we can rearrange the PS ratio to get an expression for the stock price as…
How did we get this? Simple multiplication of both sides of the ratio formula PS s.
This approach to calculating the share price is actually appliedvaluation multiples, one of the three main performance modesinventory valuation.
How to calculate stock price based on dividends
In addition to price-based multiples, we can also use dividend indices and rearrange them to get an expression of stock price.
Let's take dividend yield as an example. It is calculated as follows...
WhereGto reflectdividend per share, and as before,represents the share price.
Again, the approach to calculating a stock's price based on dividends is pretty much the same as the approaches we've seen before.
Basically, it's just a matter of rearranging the equation.
In this case, we can rearrange the equation to get the stock price formula as...
Incidentally, this comparison is actually comparable to the (famous) Dividend Discount Model (DDM)!
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The Dividend Discount Model (DDM) in its simplest form expresses the price of a stock as…
Hererefers to the dividend per share, as mentioned above. irefers tocost of capital.
And while there are many ways to estimate the cost of capital, for example, usingCapital asset pricing model (CAPM), can also be represented by the dividend yield.
In other words, dividend yield can be seen as an appropriate measure of cost of capital. In other words…
And since the cost of capital is appropriatediscount, can we also consider the dividend yield as an appropriate discount rate!
It is important to note that this is onlyAnformestimate the cost of capital.
It's notany wayAnyway.
Another way is to use CAPM (as mentioned above). In fact, we use the CAPM in oursCost of capital calculator.
There are other ways of estimating the cost of capital and we cover them in detail in ourThe ultimate guide to cost of capital.
Now let's think about how to calculate share price, from free cash flow to equity.
How to calculate stock price from free cash flow to equity
In terms of cash flow, there are roughly two types, including:
- Free cash flow(FCF), God
- Free Cash Flow to Equity (FCFE) (također poznat kao "Flow to Equity", "FTE")
Note that this ignores the accountant's perspective on the types of cash flows, which would typically be:
- operating cash flows
- invest cash flows
Although free cash flow (FCF) is cash flowdistribute freelyon debtslikefor stock investors, FCFE is the cash flow that isdistribute freelyexclusively for equity investors.
It is very common forverdisconteerde cashflow(DCF) valuation models for working with free cash flow and free cash flow to equity.
If you want to estimate stock price based on free cash flow, you're probably better off using FCFE.
This is because FCFE again refers exclusively to equity investors, while FCF refers to both debt and equity investors.
Debt is largely irrelevant in the context of calculating stock prices. Debts are very relevant when calculating valuecompany(also called enterprise value).
And yes, valuesocietyis not necessarily equal in valuecapital.
Remember: actions areheritage instruments.Therefore, it would be ideal to work with cash flow related to capital.
Vasable toAlso estimate the share price using free cash flow, but you will need to further adjust and correct the model.
Basically, you need to subtract or eliminate debt from your business valuation to get an equity valuation.
Then you take that stock valuation as your primary proxy for stock price valuation.
Basically, you can calculate the share price from free cash flow to equity as follows:
Note that this stock price formula is aplaceA simplified approach in that it implicitly assumes that free cash flow remains constant indefinitely.
How to calculate the price of a stock with non-constant free cash flow to equity
If you prefer not to assume constant free cash flow, you can write a stock price formula using FCFE as…
As complicated as it may seem, it's actually very simple.
Instead of working with one constant FCFE, we can now work with different FCFE at different times.
If you were to open up the stock price formula above, you would…
Calculate the "correct" share price
It could be argued that this share price calculation (using FCFE) allows the investor to get the "best" estimate of the share's net asset value.
But that's not necessarily true.
After all, the assessment is subjective and depends on both context and preferences.
We talk more about this idea in our "Introduction to Titration" video, which you can watch here:
We hope you now know how to quickly and easily calculate the share price.
Note that there is in fact much more than what we have shown.
For example, how do you know what the "correct" free cash flow is for the value of a stock? Or what is the value of the 'right' dividend?
And how do you actually know what the correct cost of capital is?
These are interesting and important questions. And the truth is that there is no one right answer to these questions. But it's still important to ask these questions.
If you want to learn how to rigorously value stocks and create your own robust stock valuation system, be sure to take the course below.
However, this is the summary from our side for now. Keep loving and learning about finance!
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