Understand a business.
Learn what it is worth.

What valuing a company means

Valuation estimates what you would pay today for the money a business can generate for its owners. Price is what the market or seller asks; value is your estimate, conditional on your expectations and risk.

First, understand what you are buying

A share is a small ownership interest in a company. If there are 50 million equal shares and you buy one, you own one fifty-millionth. Start by writing what the business sells, who pays, what costs it bears and why customers would keep buying.

Example: Taller Norte makes parts for industrial customers. Sales depend on the number of parts delivered and the price per part. It needs staff, materials, machinery and inventory. Selling more only creates value if future cash compensates for that investment and its risk.

A euro tomorrow is worth less than a euro today

If you require 10% a year, €100 today must become €110 in one year. To work backwards, divide: that is discounting. Rate r represents the return required for time and risk; it is not a promised return.

Present value = future cash flow / (1 + r)ᵗ
€110 / (1 + 0.10)¹ = €100 today
t = years until receipt; r = annual rate as a decimal

From the whole business to your share

Operating value (EV) values the business before allocating it among providers of capital. To get shareholders’ value (equity), add cash beyond operating needs and subtract debt and other senior claims. Then divide by diluted shares, including the effect of rights that can become shares.

Equity = EV + excess cash − debt − other claims
Separate example, €m: 1,000 + 100 − 200 − 20 = 880
€880m / 50m shares = €17.60/share

Your first deliverable: explain the business in two sentences and distinguish price, business value and per-share value. The short examples are independent; each calculator states its own starting data.

Turn data into defensible inputs

Read the three financial statements

The income statement explains revenue, expenses and profit over a period. The balance sheet shows assets, liabilities and equity at a date. The cash-flow statement explains changes in cash through operations, investing and financing. Download all three from the annual report and read their notes: one isolated number does not explain the business.

Start with a profitable, understandable company with public reports. Record all amounts in the same currency and scale: €m means millions of euros. Net income is after interest and taxes; EBIT is before them.

Define the company, share class, exchange, currency, fiscal year end, analysis date, and price date. Use only information published by the cutoff. For an ADR, reconcile how many shares it represents. Do not divide amounts in millions by share counts in units.

For this path gather 3–5 years and the latest published period. Look for stable earnings and cash; cyclical businesses require a complete cycle.

For this path reconstruct 5–10 years where available, segments, reinvestment and financing. For a younger company use its full history and state that limitation.

Annual statements, trailing twelve months, and quarterly data

LTM means the last twelve months. Combine the last full year with the current period and subtract the same prior-year period to avoid duplication. Quarterly cash flows may be cumulative: separate each quarter before comparing.

Standalone Q2 flow = six-month flow − Q1 flow
LTM = last FY + current YTD − comparable prior YTD
Example: LTM CFO = 120 + 75 − 60 = 135 M
Do not apply to balance sheet items, ratios, or average shares.

Normalization is not accepting every adjustment

Normalization estimates repeatable earnings under normal conditions. Do not remove a cost just because management calls it exceptional. Accept an adjustment when you can explain why it will not recur and its tax effect. EPS is net income divided by shares: check that the income belongs to those same shares.

The company reports net income of 100 M. Management excludes 20 M of pretax expenses; you accept only 8 M for an exceptional closure. The other 12 M are recurring.

Normalized income = 100 + 8 × (1 − 25%) = 106 M
Normalized EPS = 106 M / 50 M shares = €2.12/share
Reported → management adjustment → accepted adjustment → tax effect → normalized

NOPAT = EBIT × (1 − T)
FCFF = NOPAT + D&A − capex − ΔNWC
FCFF → WACC → operating value

FCFE = net income + D&A − capex
       − ΔNWC + debt issued − debt repaid
FCFE → Ke → equity

Document each input: source, page or note, amount, unit, period, adjustment, and verification status. Keep the original figure alongside the normalized one. A material unknown is not zero.

Before calculating: keep a table of original figure, adjustment, normalized figure, period, unit and source. If you cannot reconcile earnings, cash, debt or shares, record the question and resolve it before concluding.

Choose the method before calculating

The method must fit how the business earns money. A multiple compares price with a business metric; a DCF adds discounted future cash; an asset valuation estimates what remains after obligations. Choose before entering numbers.

The quick path teaches two estimates for a profitable business. If your company does not fit, finish with the open questions and move to specialist analysis before using the result.

The professional path starts with those two calculations, builds an industrial DCF and then studies how formulas change for banks and property. That comparison does not replace a tailored model where needed.

Two simple calculations and one difficult question

Independent quick-path exercise: normalized EPS €3, 50 M shares, and normalized FCFE 120 M. These are fictional assumptions, separate from the DCF below.

What you will calculate and what each assumption means

EPS means earnings per share. P/E is price divided by EPS: 18× means paying €18 for each euro of annual earnings. Here you choose the multiple at which the share might sell in five years, not today’s observed P/E.

Ke is the annual return shareholders require. A dividend is cash received per share. FCFE is cash available to shareholders after operations, reinvestment and financing; it is neither the bank balance nor necessarily paid out in full.

FCFE ≈ CFO − capex + debt issued − debt repaid
Example, €m: 180 − 60 + 20 − 20 = 120
€120m / 50m shares = €2.40/share
Cash-yield value = €2.40 / 0.06 = €40

This FCFE example assumes CFO already includes interest and taxes and that stock compensation has been normalized. Yield is annual cash per share divided by value: requiring a higher yield reduces value. Check that the cash input supports the growth assumed.

How to choose assumptions for a real company

For growth, connect customers or volume, pricing, costs and share count; compare with history. For P/E, compare companies with similar growth, risk and accounting at the same date, using EPS for the same period. Define a range and explain why your company belongs at its upper or lower end. A sector average alone is insufficient.

For Ke, start with a risk-free rate in the cash-flow currency and add compensation for equity risk. Cross-check the yield against sustainable cash and comparable businesses. The workshop’s starting values are teaching assumptions, not recommended rates or market data.

1. Normalize earnings and cash flow, including reinvestment and SBC.
2. Estimate per-share growth and the exit multiple using duration, returns, and risk.
3. Discount the future price and add dividends not already included.
4. Cross-check against cash flow yield and explain differences.
5. Ask what the price requires and what evidence could reject the case.

EPS₅ = EPS₀ × (1 + per-share growth)⁵
Price₅ = EPS₅ × exit P/E
Value₀ = Price₅ / (1 + Ke)⁵ + Σ Dividendₜ / (1 + Ke)ᵗ
Second lens: value₀ = normalized FCFE / shares / required yield

Try it: change one assumption and read the calculation

The yield is not the same as Ke. Under stable growth, value = FCFE₁/(Ke−g): forward yield is Ke−g. Ke of 10% and g of 4% imply 6%, only if reinvestment funds that growth sustainably. Here you capitalize the entered cash flow directly, without automatic growth.

Build a cautious, central and optimistic case

Record your starting results as the central (base) case. For the cautious (bear) case, try growth 2%, P/E 14×, Ke 11%, FCFE €100m and yield 7%; keep everything else. For the optimistic (bull) case, try 7%, 20×, 9%, €140m and 5%. These are fictional practice scenarios, not probabilities. Write which business changes would justify each set.

Your deliverable: both values in all three scenarios, sources for your assumptions and an explanation of the differences. Increasing Ke or yield with everything else unchanged should reduce value.

Build value from business drivers

The company starts with revenue of 1,000 M and an EBIT margin of 20%. We project five full years from the end of year 0, with cash flows received at each year end. Amounts are in millions of euros except per-share value.

Design the model first; then enter numbers

DCF means discounted cash flow. Forecasting turns an explanation of the business into annual numbers. Year 0 is the latest year-end; years 1–5 have not happened yet. Here FCFF belongs to debt and equity providers together: discount it at WACC, then bridge to equity.

Start with units sold × price to justify revenue. Divide EBIT by revenue to get margin. Estimate machinery investment (capex), accounting wear and tear (D&A) and cash tied up in receivables and inventory less payables (NWC). Δ means change: only the increase in working capital consumes additional cash.

Assumption example: revenue rising from €1,000m to €1,060m implies 6% growth. If working capital requires 15% of revenue, it rises from €150m to €159m and consumes €9m. Justify that 15% using historical collections, inventories and payments; do not choose it to raise value.

Estimate the cost of capital before the result

Ke = Rf + beta × ERP
WACC = E/(D+E) × Ke + D/(D+E) × Kd × (1−T)
Separate example: Ke = 3% + 1.2 × 5% = 9%
WACC = 80% × 9% + 20% × 5% × (1−25%) = 7.95%

Rf is the risk-free rate; beta measures market sensitivity; ERP is the equity risk premium; Kd is the current cost of debt; T is the tax rate applicable to interest savings. E and D are market values of equity and debt. Record source and date, keep currency consistent and pair nominal cash flows with nominal rates. For private companies, beta can be estimated from peers and adjusted for leverage.

The lab starts with WACC 9%, a separate assumption from the 7.95% example. Test a justified range. Do not add risks to the rate if you have already penalized those same risks in cash flows without explaining the treatment.

These change growth, margin, and WACC; other inputs stay as entered. Bear: weaker demand/margins and a higher cost of capital. Bull: stronger growth/profitability. These are educational narratives, not probabilities.

Enter assumptions in calculation order

Revenueₜ = Revenueₜ₋₁ × (1 + gₜ)
EBITₜ = Revenueₜ × marginₜ
NOPATₜ = EBITₜ − operating taxes
ΔNWCₜ = Revenueₜ × %NWC − NWCₜ₋₁
FCFFₜ = NOPATₜ + D&Aₜ − capexₜ − ΔNWCₜ
PVₜ = FCFFₜ / (1 + WACC)ᵗ

NOPAT₆ = NOPAT₅ × (1 + stable g)
Reinvestment₆ = NOPAT₆ × stable g / terminal ROIC
FCFF₆ = NOPAT₆ − Reinvestment₆
TV₅ = FCFF₆ / (WACC − stable g)
Terminal PV = TV₅ / (1 + WACC)⁵

EV = sum of discounted FCFF + discounted terminal value
Equity = EV + excess cash − debt − other claims
Value/share = Equity / diluted shares

What turns this exercise into professional work

Ending PP&E = opening PP&E + capex − D&A ± other
Ending debt = opening debt + issuance − repayments
Ending cash = opening cash + CFO + CFI + CFF
Ending shares = opening shares + issuance − buybacks

Your professional deliverable: reconciled historicals, documented assumptions, annual cash flows, terminal value, equity bridge, sensitivity and scenarios. Recalculate the first row by hand; explain how much value depends on the terminal and whether its economics are sustainable.

What does the price you pay require?

You have moved from assumptions to value. Now reverse the process: fix the price and ask what the business would need to achieve to justify it. This cross-checks your thesis; it does not produce a second independent valuation.

This independent reverse DCF fixes initial FCFF, WACC, terminal g, and a ten-year horizon. It solves for constant FCFF growth that matches observed EV. It does not exactly reproduce the revenue-driven DCF above.

Observed EV = price × shares + net debt and other claims
FCFFₜ = FCFF₀ × (1 + implied growth)ᵗ
Solve for implied g: PV(FCFF + terminal) = observed EV

Compare it with market size, market share, pricing, margins, and required capital. Different combinations can justify the same price: the solution does not reveal what the market “thinks.” For banks, use implied ROE/payout; for REITs, NOI/cap rate.

The method depends on the business

You now know the industrial DCF. These cases show why the calculation changes: for banks, debt is part of the product; for property, each asset’s rental income matters. BVPS is book equity per share, payout is the fraction of earnings distributed and cap rate is annual operating rent divided by property value.

Select a case: what to measure, which method to use, and where errors arise. Two companies in the same sector may need different approaches because of maturity, balance sheets, or cyclicality.

Two examples with different formulas

Retention = g / ROE
Payout = 1 − g / ROE
P/B = (ROE − g) / (Ke − g)
Value = BVPS × P/B

Gross value = NOI / cap rate
NAV = gross value + cash − debt − claims
NAV/share = NAV / shares

From a range to a conditional conclusion

Compare price with a value range and check what happens if your assumptions fail. A margin of safety is the discount you decide to require to absorb some error. Its size should respond to uncertainty; it does not eliminate risk.

Write the strongest opposing argument before finalizing the base case. Do not average insolvency with growth. A critical unknown needs research even when the price looks cheap.

Discount to value = 1 − price/value
Upside = value/price − 1
Price 80, value 100:
discount 20%; upside 25%

MOS = 10% + 30% × (sum of scores / 16)
Attractive entry = base × (1 − MOS)
Exceptional entry = min(attractive entry, bear × 90%)

Make your thesis falsifiable

Fictional example: “Normalized EBIT margin above 18%; if it falls below 16% for two quarters because of weaker pricing, I revise the base case.” Add the KPI source, timing, owner, and action. Price can change without changing value; ROIC or solvency can change both.

Example conclusion: “My range depends on retaining customers and margins. Before acting I must confirm debt and reinvestment. If margin persistently falls by two percentage points, I will recalculate value.” For a quick valuation, deliver that conclusion with your two methods and three scenarios.

Organize reproducible research

Now choose a real business. Create a file with Sources, Historicals, Adjustments, Valuation and Conclusion sheets. Enter published data first and link calculations to those cells; clearly separate your assumptions.

Work with financial statements, notes, earnings presentations, and dated market data. A spreadsheet or model is useful only if you can explain its sources, assumptions, and limitations.

From financial statements to a model

1. Identify the company, share class, currency, and cutoff date.
2. Collect annual reports, interim statements, and notes published before the cutoff.
3. Record the source, page, period, and unit for every figure. Separate reported data, analyst estimates, and your own assumptions.
4. Reconcile earnings, cash, debt, and shares. Explain adjustments, acquisitions, and changes in reporting scope.
5. Build scenarios and check accounting identities, units, dates, and sensitivity.
6. Save a dated version of the model and memo. When new evidence arrives, retain the earlier case and explain what changed.

Final project: a valuation someone else can reproduce

Quick path: keep a business profile, 3–5 years of data, an EPS and FCFE bridge, your two estimates in three scenarios and one page with range, price, risks and open questions. Someone else should be able to reproduce your figures from the sources.

Professional path: add longer historicals and segments, projected earnings, assets, working capital, debt and cash, DCF, WACC and terminal rationale, sensitivity, a multiples cross-check and price-implied expectations. Archive a memo with thesis, contrary evidence, maturities, invalidation conditions and review date.

If the business is unlisted, value total equity without inventing a share price. Compare it with the seller’s asking price and adapt owner compensation, related-party transactions, debt, control and liquidity. Do not apply arbitrary discounts. If decisive data is missing, the final result is a list of outstanding due-diligence items.

Completion criterion: every figure has an identified source or assumption; units and dates reconcile; you can explain the range and what would invalidate it. A working calculation still needs evidence before application.

Practice, write, and save your reasoning

Answer before reading the explanation. Check who owns the cash flow, the period, units, and reinvestment.

Your notebook

Notes and completed steps are saved only in this browser when local storage is available. They are not sent to services. Download a copy to keep or move it. Calculators reset when the page reloads.

Support every assumption

Start with financial statements and their notes. Use earnings presentations to understand management's explanation, then compare it with reported figures and independent evidence. Analyst estimates are expectations, not facts.

• Investor.gov · P/E definition
• Damodaran · FCFF and cost of capital
• Annual and interim reports: income statements, balance sheets, cash flows, segments, and notes.
• Earnings presentations and releases: outlook, capital allocation, and management targets.
• Dated market data: price, share count, interest rates, and consistent comparables.
• Free cash flow to equity models
• Growth, reinvestment, and returns
• Valuing financial institutions
• Adjusted funds from operations in real estate

The examples are educational and use fictional figures. A conclusion about a real company requires reconciled evidence, an adapted model, and a review of its risks.