Back-of-Envelope Valuation

You do not need a 50-tab spreadsheet to get a rough sense of what a stock is worth. The best investors often start with back-of-envelope math — a quick sanity check that takes revenue, applies a margin, multiplies by a reasonable earnings multiple, and divides by shares outstanding. If the number is nowhere near the current price, you either have a potential opportunity or a clear pass.

This tool automates that napkin math and shows you every step of the logic chain so you can adjust your assumptions on the fly.

Try It: Back-of-Envelope Valuation

Enter a company's revenue, net margin, the P/E multiple you think it deserves, and the share count. The tool walks through the calculation step by step and shows implied upside or downside from the current price.

The Three-Step Logic

This approach works because all equity valuation ultimately comes down to earnings power multiplied by a multiple:

1. Revenue × Net Margin = Earnings. This tells you how much profit the company generates from its sales. If a $10B revenue company has 15% margins, it earns $1.5B.
2. Earnings × P/E Multiple = Market Cap. The multiple reflects how much investors are willing to pay per dollar of earnings. A 20x multiple on $1.5B earnings implies a $30B market cap.
3. Market Cap ÷ Shares = Price Per Share. Divide the implied market cap by the number of shares outstanding to get a per-share fair value estimate.

When to Use This Approach

• Initial screening: Quickly filter out stocks that are obviously overpriced or suspiciously cheap before doing deeper work.
• Sanity-checking DCF outputs: If your DCF says a stock is worth $200 but the envelope math says $50, one of your models has a problem.
• Quick scenario analysis: What if margins expand to 20%? What if growth slows and the multiple compresses? You can run these scenarios in seconds.
• Comparing competitors: Apply the same margin and multiple assumptions across peers to see which is cheapest on a consistent basis.

Choosing the Right Multiple

The P/E multiple is where art meets science. Some guidelines:

• Slow-growth, stable businesses: 10-15x (utilities, consumer staples)
• Average-growth quality companies: 15-20x (S&P 500 average)
• Fast-growing compounders: 20-35x (strong moat + durable growth)
• Hyper-growth or speculative: 35x+ (requires strong conviction in future growth)

Screen for Opportunities

Use our screener to find stocks that might be trading below their envelope valuation:

• Start with the Value Screener Preset to surface fundamentally cheap stocks.
• Or filter for profitable companies with low P/E and high margins — the ideal candidates for envelope math.