Valuation Ratios

FAST Graphs™ uses essentially three formulas to determine the intrinsic value of a business. These consist of two widely-accepted formulas, and the third formula is an extrapolation between the two.

GDF – Formula #1:

This is Ben Graham’s famous formula for valuing a business and is used for companies with earnings growth of 5% or less. This is the basic formula: V*= EPS x (8.5+2g). When this formula is utilized we designate it as such to the right of the graph in orange letters GDF, which stands for Graham Dodd Formula. This formula will compute a minimum P/E of 8.5 and maximum P/E of 18.5 depending on the growth rate of the prospective company (0% to 5%). However, for consistency, FAST Graphs caps the P/E ratio to 15 when utilizing this formula.

P/E=G – Formula #2:

Our second formula is the classic P/E=G (P/E equals earnings growth rate) and when this formula is used it is designated in the orange box P/E=G. This formula is used for faster growing companies showing earnings growth of 15% or better.

GDF…P/E=G – Formula #3:

Our third formula is designated GDF…P/E=G which stands for Graham Dodd Formula-P/E equals growth, to distinguish it from the other two. This is an extrapolation between the pure GDF and P/E=G. This formula is used for companies growing earnings of 5% to 15% (5.01% to 14.99%). This represents a range that the average company falls in. Therefore, when this formula is used, a straight 15 multiple (P/E = 15) representing average will compute.

Video: How FAST Graphs Draws Fair Valuation Reference Lines