April 2, 2026 โข Global
How to Value Any Business in 2026: 3 Sets of Formulas for Price, Shares & ROE
In 2026, investors buying a private or public company need three things: formulas to evaluate financial health (ROE, ROIC, FCF, margins, debt-to-equity), formulas to calculate total business worth (asset-based, earnings multiple, DCF, precedent transactions, liquidation value), and formulas to determine share count and price per share (equity value divided by shares outstanding). This guide provides all formulas with a worked example of a $3M manufacturing company.
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ROE
Return on Equity
Net Income / Shareholders' Equity. Measures how well management uses shareholder money. Desired: >15โ20% consistently.
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ROIC
Return on Invested Capital
Net Operating Profit After Tax / (Total Debt + Equity). More accurate than ROE because it includes debt. Desired: >10โ15%, higher than WACC.
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Gross Margin
Gross Margin Formula
(Revenue - COGS) / Revenue. Desired: Stable or improving over time.
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Net Margin
Net Margin Formula
Net Income / Revenue. Desired: Stable or improving over time.
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D/E
Debt to Equity
Total Liabilities / Shareholders' Equity. Desired: <1 for small business, <2โ3 for stable large company.
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FCF
Free Cash Flow
Operating Cash Flow - Capital Expenditures. Desired: Positive and growing. The real cash you can take out.
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Asset-Based
Asset-Based Valuation
Equity Value = Total Assets - Total Liabilities. Use adjusted market value of assets, not book value. Best for distressed or holding companies.
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Earnings Multiple
Earnings Multiple Valuation
Business Value = Maintainable Earnings ร Industry Multiple. Small risky biz: 2-4ร. Stable: 5-8ร. Strong brand: 10-15ร+.
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DCF
Discounted Cash Flow
Value = ฮฃ [FCFt / (1+r)^t] + Terminal Value / (1+r)^n. r = discount rate (15โ30% for small biz, 8โ12% for large). Terminal Value = FCF_final ร (1+g) / (r - g), g = 0โ3%.
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Precedent
Precedent Transactions
Valuation Multiple = (Purchase Price of similar company) / (Their EBITDA or Revenue). Apply that multiple to your target's EBITDA or Revenue.
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Liquidation
Liquidation Value
Net Liquidation Value = Cash + (AR ร 80%) + (Inventory ร 50%) + (Fixed Assets ร 20-40%) - All Liabilities. This is the floor price.
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Shares Basic
Basic Shares Outstanding
Issued & Outstanding Shares from the balance sheet or cap table.
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Shares Diluted
Diluted Shares Outstanding
Basic Shares + Options + Warrants + Convertibles. Accounts for potential future dilution.
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Equity Value
Equity Value Formula
Enterprise Value - Total Debt + Cash. This is what shareholders actually own.
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Price Per Share
Price Per Share (Existing)
Equity Value / Basic Shares Outstanding. The fair value per stock based on the business.
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New Share Price
Price Per Share (New Issuance)
Equity Value / (New Total Shares). Used when buying a business and creating new shares arbitrarily.
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Intrinsic vs Market
Undervalued or Overvalued
If Intrinsic Value > Market Price โ Undervalued (buy). If Intrinsic Value < Market Price โ Overvalued (avoid).
- ROE = Net Income / Shareholders' Equity (Desired: >15โ20% consistently)
- ROIC = Net Operating Profit After Tax / (Total Debt + Equity) (Desired: >10โ15%, higher than WACC)
- Gross Margin = (Revenue - COGS) / Revenue (Desired: Stable or improving)
- Net Margin = Net Income / Revenue (Desired: Stable or improving)
- Debt to Equity = Total Liabilities / Shareholders' Equity (Desired: <1 for small biz, <2โ3 for large stable co)
- Free Cash Flow (FCF) = Operating Cash Flow - Capital Expenditures (Desired: Positive and growing)
- Asset-Based (distressed or holding co): Equity Value = Total Assets - Total Liabilities (use adjusted market value of assets, not book value)
- Earnings Multiple (most common for small/medium biz): Business Value = Maintainable Earnings ร Industry Multiple. Small risky: 2-4ร, Stable: 5-8ร, Strong brand: 10-15ร+
- Discounted Cash Flow (DCF): Business Value = ฮฃ [FCFt / (1+r)^t] + Terminal Value / (1+r)^n. r = discount rate (15โ30% small biz, 8โ12% large). Terminal Value = FCF_final ร (1+g) / (r - g) where g = perpetual growth rate (0โ3%)
- Precedent Transactions: Valuation Multiple = (Purchase Price of similar co) / (Their EBITDA or Revenue). Apply to target's EBITDA/Revenue
- Liquidation Value (floor price): Net Liquidation Value = Cash + (AR ร 80%) + (Inventory ร 50%) + (Fixed Assets ร 20-40%) - All Liabilities
- If buying the whole business and creating new shares: You decide number of shares arbitrarily (e.g., 1,000,000). Price Per Share = Equity Value / Total Shares
- If business already has shares outstanding: Basic Shares = Issued & Outstanding Shares from balance sheet/cap table
- Diluted Shares = Basic Shares + Options + Warrants + Convertibles (accounts for dilution)
- Equity Value per Share (Basic) = Equity Value / Basic Shares
- Equity Value per Share (Diluted) = Equity Value / Diluted Shares
- For public company stock: Intrinsic Value Per Share = Business Equity Value / Shares Outstanding
- If Intrinsic Value > Market Price โ Undervalued (buy). If Intrinsic Value < Market Price โ Overvalued (avoid)
- Step 1 โ Evaluate: Net Income = $300,000, EBITDA = $500,000, Debt = $200,000, Cash = $50,000, FCF = $250,000
- Step 2 โ Value whole business: Using 6ร EBITDA multiple (industry norm). Enterprise Value = $500,000 ร 6 = $3,000,000
- Step 3 โ Get Equity Value: Equity Value = Enterprise Value - Debt + Cash = $3,000,000 - $200,000 + $50,000 = $2,850,000
- Step 4 โ Shares & price (current shares outstanding = 500,000): Price per share = $2,850,000 / 500,000 = $5.70 per share
- If issuing new shares after buying (e.g., 1,000,000 shares for new partners): Price per new share = $2,850,000 / 1,000,000 = $2.85
KEY QUOTES
Step one: evaluate financial health using ROE, ROIC, FCF, margins, and debt-to-equity. Do not skip to valuation before quality is confirmed.
Step two: value the whole business using at least three methods โ asset-based, earnings multiple, and DCF โ then weight the results.
Step three: calculate equity value by subtracting total debt and adding cash to enterprise value. Debt reduces what owners actually keep.
Step four: determine shares outstanding from the cap table. Basic shares are issued and outstanding. Diluted shares add options and converts.
Step five: divide equity value by basic shares to get price per share. For new issuances, divide by total shares after the new round.
For public companies: compare intrinsic value per share to market price. If intrinsic is higher, consider buying. If lower, avoid.
In DCF, forecast free cash flow for 5โ10 years. Apply a discount rate equal to your required return. Add terminal value using perpetual growth.
Terminal value formula: final year FCF multiplied by (1 + perpetual growth rate), then divided by (discount rate minus growth rate).
Liquidation value is the floor. Calculate it as cash plus 80% of receivables plus 50% of inventory plus 20โ40% of fixed assets minus all liabilities.
For small businesses, replace EBITDA with seller's discretionary earnings (SDE) โ net income plus owner's salary, perks, and non-recurring expenses.
business valuation
stock price
shares outstanding
enterprise value
equity value
DCF
EBITDA multiple
ROE
ROIC
free cash flow
price per share
discounted cash flow
terminal value
liquidation value
precedent transactions
small business acquisition
buy a company
stock valuation
intrinsic value
return on equity
return on invested capital
gross margin
net margin
debt to equity
operating cash flow
capital expenditures
maintainable earnings
industry multiple
discount rate
perpetual growth rate
asset-based valuation
earnings multiple method
basic shares
diluted shares
options
warrants
convertibles
undervalued
overvalued
weighted average valuation
seller's discretionary earnings
SDE