Investing tools

Back-of-the-Envelope Valuation

Quick, simple tools for sanity-checking what a company is worth.

No company numbers needed. Given the P/E you pay and the P/E you expect to sell at, how fast must earnings grow to hit your target return?

Quick question: what growth is priced in?

If I pay x earnings and want % a year over years, how fast must earnings grow?

Inputs

P/E you pay today x P/E when you sell x

Target annual return % Holding period yrs Dividend yield (optional) %

Required earnings growth per year

Required growth by exit P/E and holding period

The highlighted cell matches your inputs (when your exit P/E is one of the columns).

How to do the P/E math in your head in about 10 seconds.

The core rule

Annual return ≈ earnings growth + dividend yield + P/E change per year

Flip it to get the growth you need: required growth ≈ target return − dividend yield − P/E change per year

Turn the P/E change into a total %Use the table below (e.g. 25x → 15x ≈ −50%).

Divide by the number of yearsThis gives the P/E effect per year.

Subtract it from your target returnSubtracting a negative effect means adding it. What's left is the growth you need.

Worked example: pay 25x, sell at 15x in 5 years, want 10%/yr

25 → 15 is −50% total → −50 ÷ 5 = −10%/yr → need 10 + 10 = ~20%/yr earnings growth (exact: 21.8%)

Reverse, 15 → 25: +50% ÷ 5 = +10%/yr → need 10 − 10 = ~0% growth (exact: −0.7%)

Step 1 cheat sheet: P/E change → total effect

Change	Example	Effect
×1.25	20x → 25x	+22%
×1.5	10x → 15x	+40%
×1.67	15x → 25x	+50%
×2	10x → 20x	+70%
÷1.25	25x → 20x	−22%
÷1.67	25x → 15x	−50%
÷2	30x → 15x	−70%

Rule of 72: a P/E that doubles (or halves) over n years adds (or costs) about 72 ÷ n % per year.

Sanity check: what P/E is "fair"?

Fair P/E ≈ 1 ÷ (required return − long-term growth)

Growth forever	Fair P/E @ 10%
0%	10x
3%	~14x
5%	20x
6%	25x
7%	~33x
8%	50x

For a mature company paying out most of its earnings. A 25x P/E implies roughly 6% growth forever, and above 25–30x small changes in growth swing the price a lot.

Earnings yield = 1 ÷ P/E

25x means 4%, and 15x means ~6.7%. With no growth and a steady P/E, your return is roughly the earnings yield. Compare it with bond yields as a quick floor.

Time is on your side

The same P/E change hurts less per year the longer you hold. A halving costs about 14%/yr over 5 years but only about 7%/yr over 10.

One-liner to remember

Get the P/E change per year (72 ÷ years for a doubling or halving), then subtract it from your target return. What's left is the earnings growth you need.

Value a company from free cash flow alone: grow it for 5 years, add a terminal value, and discount everything back to today. Currency amounts are in millions, except share price.

Inputs

Free cash flow (current) $m FCF growth (yrs 1-5) %

Discount rate % Terminal growth %

Net debt (debt − cash) $m Shares outstanding m Current share price $

Estimated value per share

Breakdown

A revenue-based DCF: revenue × FCF margin, projected for 5 years, with a comparable EV/Revenue multiple as a cross-check. Currency amounts are in millions, except share price.

Company

Revenue (current) $m Revenue growth (yrs 1-5) % FCF margin % Net debt (debt − cash) $m Shares outstanding m Current share price $

Assumptions

Discount rate (WACC) % Terminal growth % Comparable EV/Revenue x

DCF value per share

Multiples value per share

Based on EV/Revenue

Back-of-the-Envelope Valuation

Quick question: what growth is priced in?

Inputs

Required growth by exit P/E and holding period

The core rule

Step 1 cheat sheet: P/E change → total effect

Sanity check: what P/E is "fair"?

Earnings yield = 1 ÷ P/E

Time is on your side

One-liner to remember

Inputs

Breakdown

Company

Assumptions

Breakdown

5-year projection ($m)