Stock Valuation

Is a share cheap or expensive? Enter its price and its profit per share for the price/earnings ratio. Add the P/E of similar companies for a quick fair value. If the company pays a dividend, switch it on to see the dividend yield, the payout ratio and the value from the dividend discount model, side by side with the price.

FinanceInvestingValuationDividends

Inputs

Input examples

EPS (earnings per share) is the yearly net profit divided by the number of shares; use the last twelve months (trailing) or the forecast for next year (forward), but compare like with like. Fields marked optional can be left empty. For education only — not financial advice.

Currency

Share price P — €

Earnings per share EPS — € per year

Expected earnings growth — % per year, optional

P/E of similar companies — times, optional

Does the company pay a dividend?

Dividend paid

Dividend per payment d — € per share

Dividend growth g — % per year, long term

Return you require r — % per year

Amount to invest — €, optional

How is a Share Valued?

The price/earnings ratio tells you how much investors pay for one unit of yearly profit. A P/E of 20 means the price equals 20 years of today’s earnings; its inverse, the earnings yield (1/20 = 5%), is easy to compare with the interest on savings. A high P/E often means investors expect fast growth, so the PEG ratio divides the P/E by the growth in percent: around 1 is commonly read as a fair balance. Multiply the earnings by the P/E of similar companies for a quick estimate of what the share could be worth.

Many companies pay part of their profit as a dividend. The dividend yield compares a year of dividends with the price, and the payout ratio shows which part of the profit is paid out. The dividend discount model values the share as all its future dividends in today’s money: with a steady growth g that sum becomes D₁/(r − g), the Gordon growth model. It suits steady payers such as utilities and large banks; companies that pay no dividend cannot be valued this way.

The methods often disagree, and that is useful: each answers a different question. When the price is far above every fair value, the market expects more growth than you have entered.

P/E 20earnings yield 5%

PEG ≈ 1price in line with growth

r = D₁/P + greturn = yield + growth

r ≤ gdividend model breaks down

Price for Each Level of Earnings

P/E

P/E of 10, 15, 20, 25 and 30

this share’s P/E

the share price

value at the P/E of similar companies

value from dividends

Result

Enter the values above

Fair Value Compared with the Price

Method	Value per share	Price compared

Worked Techniques

P/E and PEG

Divide the share price by the yearly earnings per share, then by the expected growth in percent (12, not 0.12).

Example: at a sector P/E of 15, EPS 4.20 points to a value of 63.

Dividend Yield and Payout

A year of dividends divided by the price is the yield; divided by the earnings it is the payout ratio.

Example: 10 000 buys 200 shares at 50 and brings in 400 a year.

Gordon Growth Model

Divide next year’s dividend by the difference between the return you require and the growth. Turned around, a price of 50 implies a return of 2.08/50 + 4% = 8.16%.

Example: at 10% instead of 9% the value drops to 34.67.

Sources & Verification

References

R. A. Brealey, S. C. Myers & F. Allen, Principles of Corporate Finance, 13th ed., McGraw-Hill Education, 2020 — Ch. 4 (Valuing Bonds and Stocks: price–earnings ratios, dividend yield, the dividend discount model) and Ch. 16 (Payout Policy).
A. Damodaran, Investment Valuation, 3rd ed., Wiley, 2012 — Ch. 18 (Earnings multiples: P/E and PEG).
M. J. Gordon, The Investment, Financing, and Valuation of the Corporation, Irwin, 1962 — the constant-growth dividend model.
Z. Bodie, A. Kane & A. J. Marcus, Investments, 12th ed., McGraw-Hill Education, 2021 — Ch. 18 (Equity Valuation Models).