Pre Tax Earning – How Warren Buffet Calculates Valuation

Questions › Category: Valuation Quadrant › Pre Tax Earning – How Warren Buffet Calculates Valuation

Wendy Tan asked 3 years ago

Hi Victor, Is warren buffet 10x pre tax rule still applicable to current stock market condition to determine IV for value stock? if so, would it be comparing (10xEBIT)/share against share price? kind regards wendy

1 Answers

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Victor Chng Staff answered 3 years ago

Hi Wendy, Yes, Buffett's method still works in current market conditions, but you have to be patient for the company to reach that valuation. It usually happens more often in small-cap stocks. He purchases when the share price is below the (EBIT per share x 10)

Wendy Tan replied 3 years ago

Thanks Victor. In reference to Paypal which now appear to be more of a value stock than growth stock, will buffet’s valuation method be applicable to determine its intrinsic value? Fundamentals for paypal still look healthy.

kind regards
wendy

Victor Chng Staff replied 3 years ago

If you use Buffett’s valuation, PayPal does not meet the criteria. As mentioned, small-cap stocks easily meet such criteria as they are relatively unknown, as for large-cap stocks, usually there is a lot of bad news in the company, and then it will hit the valuation. For instance, Apple in 2016 or Meta in 2022.

You should use the method we taught you to value PayPal.