Stock Valuation in Excel: Forecasting & Key Financial Metrics

stock valuation in Excel

Stock valuation is a crucial skill for both individual investors and financial professionals. It helps assess the potential of a stock to outperform or underperform in the market. A widely used tool for stock valuation is Microsoft Excel, which allows investors to forecast future performance, calculate key financial metrics, and understand the true value of a company. In this comprehensive guide, we’ll walk through the process of performing stock valuation in Excel. We’ll cover everything from forecasting future cash flows to calculating key financial metrics like the P/E ratio, DCF, EPS, and ROE.

Why Stock Valuation Matters

Accurately valuing a stock is essential for making informed investment decisions. If the market price of a stock is above its intrinsic value, it might be overvalued. Conversely, if the stock is below its intrinsic value, it could be undervalued, presenting a buying opportunity. 

To determine a stock’s inherent value, you must consider several factors, including future cash flows, profitability, growth rates, and market conditions. In Excel, these factors are modeled through various formulas and assumptions that help generate the valuation.

Tools Required: Excel Basics and Setup

Before diving into stock valuation, it’s important to understand the essential tools in Excel:

  • Basic Excel Functions: SUM, AVERAGE, IF statements, and financial formulas such as PV (Present Value) and NPV (Net Present Value).
  • Data Input: Accurate data input is crucial for performing stock valuation. You’ll need historical financial data, forecasts, and assumptions to drive the calculations.
  • Excel Templates: For advanced users, pre-built Excel templates for financial modeling can save time and ensure consistency.

Explore Stock Valuation Templates on SHEETS.MARKET

If you’re looking for ways to improve accuracy and speed up your stock valuation processes, check out the SHEETS.MARKET collection of Excel templates. These templates are designed to make stock analysis and forecasting effortless, allowing you to focus on decision-making rather than data entry and complex formulas. Save time, reduce errors, and gain better insights into your stock investments.

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Once you’re familiar with these tools, let’s move on to the step-by-step guide.

Step 1: Gathering Financial Data

The first step in any stock valuation process is gathering the necessary financial data. This typically includes:

  • Income statement: Net income, revenue, operating expenses, and taxes.
  • Balance sheet: Total assets, total liabilities, and shareholder equity.
  • Cash flow statement: Operating, investing, and financing cash flows.
  • Market Data: Stock price, shares outstanding, and industry benchmarks.

You can download these data directly from financial reporting sites, such as the SEC’s EDGAR database or websites like Yahoo Finance or Google Finance. Once you’ve gathered the data, you’ll import it into Excel for analysis.

For this example, let’s assume we’re valuing a hypothetical company, Alpha Corp. We’ll use the following data:

MetricValue ($)
Revenue (2023)500,000,000
Net Income (2023)50,000,000
Total Assets (2023)1,200,000,000
Total Liabilities (2023)800,000,000
Shares Outstanding10,000,000
Current Stock Price$75

Step 2: Forecasting Future Cash Flows

Forecasting future cash flows is one of the most important steps in stock valuation. This involves predicting the company’s revenues, expenses, and net income for the upcoming years. To do this in Excel, you’ll need historical data to create assumptions about growth rates.

Step-by-Step Guide for Forecasting Cash Flows:

The foundation of stock valuation is forecasting future cash flows. The most common method is the Discounted Cash Flow (DCF) model, which estimates the present value of a company’s future free cash flows (FCF).

Free Cash Flow Formula:

FCF = Net Income + Depreciation/Amortization − Changes in Working Capital – Capital Expenditures

For simplicity, let’s assume Alpha Corp’s FCF for 2023 is $60,000,000. We’ll forecast FCF for the next 5 years using a growth rate of 5% annually.

YearFree Cash Flow ($)Formula
202463,000,000=60,000,000 * (1 + 5%)
202566,150,000=63,000,000 * (1 + 5%)
202669,457,500=66,150,000 * (1 + 5%)
202772,930,375=69,457,500 * (1 + 5%)
202876,576,894=72,930,375 * (1 + 5%)

Step 3: Calculating the Discount Rate

The discount rate reflects the time value of money and the risk associated with the investment. A common approach is to use the Weighted Average Cost of Capital (WACC).

WACC formula

Assume the following for Alpha Corp:

  • Cost of Equity: 8%
  • Cost of Debt: 4%
  • Tax Rate: 25%
  • Equity (E): $400,000,000
  • Debt (D): $200,000,000

WACC = (400,000,000/600,000,000 × 8%) + (200,000,000/600,000,000 × 4% × (1−25%))

WACC = 6.67%

Step 4: Discounting Cash Flows

Using the WACC as the discount rate, we’ll calculate the present value (PV) of each year’s FCF.

Present Value Formula:

present value formula
YearFree Cash Flow ($)Present Value ($)Formula
202463,000,00059,078,947=63,000,000 / (1 + 6.67%)^1
202566,150,00058,123,456=66,150,000 / (1 + 6.67%)^2
202669,457,50057,183,210=69,457,500 / (1 + 6.67%)^3
202772,930,37556,258,123=72,930,375 / (1 + 6.67%)^4
202876,576,89455,348,012=76,576,894 / (1 + 6.67%)^5

The sum of these present values is the Enterprise Value (EV) of Alpha Corp over the forecast period.

Step 5: Terminal Value and Total Enterprise Value

Beyond the forecast period, we estimate the company’s value using the Terminal Value (TV). A common method is the Gordon Growth Model.

Terminal Value Formula:

TV = FCF2028 ×(1+g) / WACC−g

Assume a perpetual growth rate (g) of 3%:

TV = 76,576,894 × (1+3%) / 6.67% − 3% = 2,147,000,000

Discount the TV to its present value:

PV of TV = 2,147,000,000 (1+6.67%)5 = 1,550,000,000

Add the PV of TV to the PV of forecasted cash flows to get the total Enterprise Value:

EV = 59,078,947+58,123,456+57,183,210+56,258,123+55,348,012+1,550,000,000

EV = 1,835,991,748

Step 6: Equity Value and Intrinsic Share Price

Subtract net debt (total debt minus cash) to derive the Equity Value:

Equity Value = EV−Net Debt

Assume Alpha Corp has $200,000,000 in net debt:

Equity Value=1,835,991,748−200,000,000=1,635,991,748

Divide by shares outstanding to find the intrinsic share price:

Calculating Key Financial Metrics

With future cash flows forecasted, you can now proceed to calculate key financial metrics that help assess a stock’s value. Below are the essential financial metrics and how to calculate them in Excel.

Price-to-Earnings (P/E) Ratio

This ratio compares a company’s current share price to its earnings per share. A high P/E might indicate overvaluation, while a low P/E could suggest undervaluation. However, the P/E ratio must be evaluated in context, considering the company’s growth potential, industry standards, and market conditions.

Formula:
P/E Ratio = Stock Price / Earnings Per Share (EPS)

In Excel:

  1. Find the stock price and EPS (from the company’s latest earnings report).
  2. Divide the stock price by the EPS value.

Discounted Cash Flow (DCF) Analysis

The DCF model is used to estimate the present value of a company based on its future cash flows. This requires a forecast of future cash flows and a discount rate, which can be determined using the company’s weighted average cost of capital (WACC).

Formula:
DCF = Sum of (Future Cash Flow / (1 + Discount Rate)^Year)

In Excel:

  1. Enter the forecasted cash flows for each year.

Use Excel’s NPV function to calculate the present value of future cash flows:
=NPV(Discount Rate, Cash Flows Range)

Earnings Per Share (EPS)

This metric shows a company’s profitability by dividing net income by the number of outstanding shares. It is essential for evaluating a company’s ability to generate profits per share.

Formula:
EPS = Net Income / Number of Shares Outstanding

In Excel:

  1. Enter net income and the number of shares outstanding into separate cells.

Use the following formula to calculate EPS:
=Net Income / Shares Outstanding

Return on Equity (ROE)

ROE measures how effectively a company generates profit from shareholders’ equity.

Formula:
ROE = Net Income / Shareholder Equity

In Excel:

  1. Input net income and shareholder equity values.

Calculate ROE using the formula:
=Net Income / Shareholder Equity

Simplify Your Workflow with SHEETS.MARKET Templates

Stock valuation in Excel is a powerful skill that combines financial theory with practical application. By following the steps outlined above, you can build a robust valuation model to make informed investment decisions. Remember, the key to success lies in accurate data, realistic assumptions, and a deep understanding of financial metrics.

Building a stock valuation model from scratch can be time-consuming and prone to errors. SHEETS.MARKET offers professionally designed Excel templates tailored for stock valuation, complete with pre-built formulas, charts, and scenario analysis tools. These templates not only save time but also ensure accuracy and consistency in your analysis.

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