Stock Valuation Model: Excel-Based Stock Analysis Guide

Investing in the stock market can be complex, but one thing remains constant: understanding how to value a stock accurately is essential to making informed investment decisions. A stock valuation model is one of the most reliable ways to assess whether a stock is overvalued, undervalued, or reasonably priced. While many sophisticated models and tools exist, Excel remains one of the most versatile and widely used platforms for stock analysis. This guide will walk through a step-by-step process to create an Excel-based stock valuation model, making stock analysis accessible and actionable.

Whether you’re a seasoned investor or just starting, this detailed guide will help you evaluate stocks more effectively using practical Excel tools. The goal is to arm you with the knowledge to make data-driven decisions and streamline your analysis process.

Why Use Excel for Stock Valuation?

Excel is the go-to tool for many professionals due to its flexibility, customization, and powerful functions. A stock valuation model in Excel offers a simple yet effective way to:

• Track key financial data.
• Conduct sensitivity analysis to test different assumptions.
• Build a robust valuation model tailored to your investment strategy.
• Visualize data through charts, graphs, and tables for more straightforward analysis.

Excel provides an excellent environment for data manipulation, allowing investors to create, modify, and test multiple scenarios based on real-time data. Excel’s tools are indispensable in organizing your research, whether using discounted cash flow (DCF), price-to-earnings (P/E) ratio, or other valuation methods.

Stock Valuation Methods in Excel

There are several stock valuation methods, each with advantages and applications. The most commonly used stock valuation models are:

1. Discounted Cash Flow (DCF) Model
2. Price-to-Earnings (P/E) Ratio
3. Dividend Discount Model (DDM)
4. Comparable Company Analysis (Comps)

1. Discounted Cash Flow (DCF) Model

The DCF model is one of the most accurate ways to value a company. It focuses on the concept that the value of a company is the present value of its future cash flows. This model requires predicting a company’s future cash flows and discounting them to their present value.

Here’s how to build a DCF model in Excel.

Step 1: Forecast Future Free Cash Flows

The first step in building the DCF model is to forecast the company’s future free cash flows (FCF). Free cash flow is the cash a company generates after accounting for capital expenditures necessary to maintain or expand its asset base. This figure is crucial because it represents the cash that can be used for dividends, debt repayment, or reinvestment.

To forecast FCF, you need the following information:

• Operating Income (EBIT)
• Depreciation and Amortization
• Changes in Working Capital
• Capital Expenditures

You can use historical data to estimate the future FCF growth rate or apply the company’s projected earnings growth rate from analysts’ reports.

Example: Assume you’re valuing a company expected to grow its free cash flow at 5% annually for the next five years. In Excel, you can forecast the FCF like this:

You can calculate the future FCF using the following formula:

= Previous Year FCF * (1 + Growth Rate)

Step 2: Determine the Discount Rate

The discount rate converts future cash flows into their present value. The Weighted Average Cost of Capital (WACC) is the most commonly used discount rate. This rate accounts for the cost of both equity and debt financing. WACC can be calculated using the following formula:

Where:

• E/V = Proportion of equity in the firm’s capital structure
• D/V = Proportion of debt in the firm’s capital structure
• R_e = Cost of equity (calculated using CAPM)
• R_d​ = cost of debt
• T = Corporate tax rate

In Excel:

1. Calculate the cost of equity using the CAPM formula:
2. re = rf + β×(rm −rf)

Where 

• rf  = Risk-free rate
• β = Beta
• rm = Market return

3. Input the cost of debt and tax rate.
4. Use the WACC formula to calculate the discount rate.

Step 3: Calculate the Present Value of Future Cash Flows

Once you have your projected FCF and discount rate, you can calculate the present value (PV) of each year’s forecasted FCF. The formula to calculate PV is:

PV = FCF(1+r)^t

Where:

• FCF = Free Cash Flow for the given year
• r = Discount rate (WACC)
• t = Number of years into the future

In Excel, you can use the formula:

= FCF / (1 + WACC) ^ Year

Here’s an example calculation for the present value of FCF for 2025:

Step 4: Calculate the Terminal Value

The terminal value represents the present value of all future cash flows beyond the projection period. This is calculated using the Gordon Growth Model:

Where:

• FCF_final = Free Cash Flow in the final year of the forecast period
• g = Long-term growth rate
• r = Discount rate (WACC)

The terminal value is then discounted to the present using the same formula as the previous cash flows.

Step 5: Sum the Present Values

Finally, to determine the company’s total value, you sum the present values of the forecasted FCF and the terminal value. This gives you the Enterprise Value (EV).

Step 6: Determine the Equity Value and Per Share Price

To find the equity value, subtract any net debt from the enterprise value. The formula is:

Equity Value = EV − NetDebtEquity Value 

Then, divide the equity value by the number of outstanding shares to find the per share price.

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

The P/E ratio is one of the simplest stock valuation models. It compares a company’s share price to its earnings per share (EPS). The formula is:

P/ERatio = Market Price per Share / Earnings per Share

This ratio provides a quick snapshot of how expensive or cheap a stock is relative to its earnings. For example, if a company’s stock is priced at $100 per share and its earnings per share (EPS) is $5, the P/E ratio is 20. You can use Excel to track historical P/E ratios, compare them with industry averages, and identify trends.

3. Dividend Discount Model (DDM)

The DDM is most applicable to companies that pay consistent dividends. It values a company by calculating the present value of expected future dividends. The formula is:

Where:

• P0 = Present value of the stock
• D1 = Expected dividend next year
• r = Discount rate
• g = Growth rate of dividends

This model is adequate for assessing stable, dividend-paying companies and can be implemented easily in Excel by forecasting future dividends and discounting them back to the present.

Practical Tips for Building a Stock Valuation Model in Excel

1. Use Templates: Excel-based templates can save you time and improve the accuracy of your analysis. Consider using pre-built stock valuation templates for quick calculations and deeper insights.
2. Be Accurate with Assumptions: Make sure the assumptions you input, such as growth rates, WACC, and capital expenditures, are based on solid research and analysis.
3. Update Regularly: Stock valuation is not a one-time process. Market conditions change, so keep your model updated with the latest financial data and market trends.
4. Use Sensitivity Analysis: It’s essential to test how sensitive your valuation is to changes in key assumptions. Excel’s built-in tools, such as Data Tables or Scenario Manager, can help you perform sensitivity analysis on key inputs such as growth or discount rates.
5. Leverage Visuals: Use Excel’s charting tools to visualize your stock valuation results. Graphs can help you better understand trends and present your findings more effectively.

Simplify Your Stock Valuation Process with SHEETS.MARKET Templates

For investors seeking a powerful yet easy-to-use stock analysis tool, SHEETS.MARKET offers the GOOG Stock Analysis Financial Model. This comprehensive Excel template is designed to streamline your valuation process, providing detailed historical financial data, balance sheets, income statements, and cash flow statements. With a robust discounted cash flow (DCF) model, financial ratio analysis, and earnings per share (EPS) projections, this template is ideal for making well-informed investment decisions. The dynamic charts and customizable inputs ensure you can tailor the analysis to your specific needs, saving you time while enhancing the accuracy of your valuations.

To explore and enhance your stock analysis process, check out SHEETS.MARKET and visit our LinkedIn profile for even more resources and updates.