Stock Valuation Calculator
Estimate the fair value of a stock using earnings per share, expected growth, and a target P/E ratio. Use it when deciding whether a stock is overvalued or undervalued before buying or selling.
About this calculator
This calculator projects a stock's fair value by compounding its current earnings per share (EPS) forward at an expected growth rate, then multiplying by a target price-to-earnings (P/E) ratio. The formula is: Fair Value = EPS × (1 + growthRate / 100) ^ timeHorizon × targetPE. The idea is that a company's future earnings determine its intrinsic worth, and the P/E multiple reflects what the market is willing to pay for each dollar of those earnings. A higher growth rate or a more generous target P/E will produce a higher fair value estimate. Comparing this result to the current market price reveals whether the stock trades at a discount or a premium. This approach is rooted in Benjamin Graham's earnings-power valuation framework and is widely used by fundamental analysts.
How to use
Suppose a stock trades at $50, has an EPS of $3.00, an expected annual growth rate of 10%, a target P/E of 18, and you have a 5-year horizon. Step 1 — Project future EPS: $3.00 × (1 + 0.10)^5 = $3.00 × 1.6105 = $4.83. Step 2 — Multiply by the target P/E: $4.83 × 18 = $86.97. The estimated fair value in 5 years is $86.97. Since the current price is $50, the stock appears undervalued relative to this projection, suggesting potential upside of roughly 74%.
Frequently asked questions
What P/E ratio should I use as the target when valuing a stock?
The target P/E is typically based on the stock's own historical average P/E, the sector average, or the broader market average (around 15–20 for the S&P 500 historically). Growth stocks often command higher P/E multiples (30+), while mature or cyclical companies trade closer to 10–15. Choosing a conservative target P/E produces a more cautious fair-value estimate, which is generally advisable for long-term investors following a margin-of-safety approach.
How does the expected growth rate affect a stock's fair value estimate?
The growth rate is compounded over the time horizon, so even small differences have a large impact on the result. For example, changing the growth rate from 8% to 12% over 10 years increases the EPS multiplier from 2.16 to 3.11 — a 44% difference in projected fair value. Analysts typically use analyst consensus estimates, historical EPS growth, or a discounted long-term GDP growth rate as a reality check to avoid overly optimistic assumptions.
When is a P/E-based stock valuation not reliable?
P/E-based valuation breaks down when a company has negative or near-zero earnings, making the ratio meaningless or misleading. It is also less useful for early-stage growth companies, cyclical businesses at earnings peaks or troughs, and firms undergoing major restructuring. In these cases, alternative methods such as price-to-sales, EV/EBITDA, or discounted cash flow analysis are more appropriate.