Step-by-Step Company Valuation: A Worked Example

How a step-by-step company valuation works

A step-by-step company valuation is not a single formula; it is five stages run in order, and the order matters as much as the arithmetic. You screen the business for quality first, estimate the cash it truly produces for an owner second, triangulate a value from two independent methods third, demand a discount to that value fourth, and compare with the price last. Skip a stage and the answer misleads. This article runs all five on one company, Texas Instruments, using figures as of July 2026, so you can see the method end to end rather than in the abstract. You can follow along in the live Texas Instruments report on Tenet.

Texas Instruments makes analog and embedded semiconductors, the unglamorous chips that manage power and signals inside cars, factories and appliances. It is a useful teaching case because it is high quality and stable in the long run yet cyclical in the short run, which forces every judgment a valuation has to make into the open. The broader map of methods sits in how to value a company; what follows is one company carried through them.

Step one: screen the business for quality

The first step is not a number at all. It is a judgment about whether the business is worth valuing, because a precise figure attached to a fragile company is worthless. Texas Instruments clears the quality bar. In fiscal 2025 it earned a gross margin near 57 percent and an operating margin near 34 percent, and it has produced high returns on capital for decades, with return on equity near 31 percent. Those margins come from a real advantage: analog chips are designed in for years, sell in huge variety at low individual prices, and rarely need the bleeding-edge manufacturing that erodes returns elsewhere.

Quality also means durability, and here you note both the strength and the wrinkle. The strength is a long record of compounding and heavy cash return to shareholders. The wrinkle is cyclicality: chip demand rises and falls with the industrial and automotive economy, so earnings swing. Texas Instruments earned $9.41 per share in fiscal 2022, then $7.07, then $5.20, and $5.45 in fiscal 2025. A business whose earnings can nearly halve peak-to-trough is durable across a full cycle but treacherous to value at any single point, which is the whole reason the later steps matter. The full quality lens is walked in how to identify high-quality businesses.

Step two: estimate owner earnings

The second step is to find the cash the business could actually hand its owner, which is often not the same as reported free cash flow. This is owner earnings, and Texas Instruments is a vivid example of why the distinction matters. In fiscal 2025 it reported operating cash flow of about $7.2 billion and capital spending of about $4.6 billion, which leaves free cash flow of only about $2.6 billion.

Taken at face value, $2.6 billion of free cash flow on a company worth roughly $276 billion looks alarming. But look at what the capital spending is for. Texas Instruments is in the middle of a multi-year build-out of new factories, and its capital spending has run far above its depreciation, about $4.6 billion of spending against roughly $2.0 billion of depreciation in fiscal 2025. Depreciation approximates the cost of maintaining the existing asset base. The spending far above it is growth investment: new capacity meant to earn future returns, not upkeep required to hold today's earnings.

Owner earnings = net income
               + depreciation and other non-cash charges
               - maintenance capital spending

Apply it with judgment. Net income was about $5.0 billion. Add back depreciation of about $2.0 billion. Then subtract not the full $4.6 billion of spending but an estimate of maintenance capital spending, the amount needed just to keep the current business running. In years before the factory build-out, capital spending ran closer to $1 billion, which suggests maintenance is somewhere in that range. On that basis, owner earnings are roughly $5.5 billion to $6.0 billion, far above the $2.6 billion of reported free cash flow. The gap is the growth investment, which an owner could stop if they chose to harvest cash instead. Getting this split right is the judgment call at the center of the method, explored further in free cash flow. Note the honesty required: the maintenance figure is an estimate, so owner earnings are a range, not a point, which is why the next step values them two different ways.

Step three: triangulate with a multiple and a DCF

The third step is to value those earnings two different ways, because a single method gives false confidence. Use a multiple and a discounted cash flow, and treat them as two instruments taking a reading on the same thing.

Start with the multiple, and start by normalizing. Valuing a cyclical business off a single year's earnings is a classic error; a trough year makes the multiple look high, a peak year makes it look cheap. Over the last six fiscal years Texas Instruments earned an average of roughly $6.90 per share, spanning a peak of $9.41 and a trough of $5.20. Call mid-cycle earnings somewhere near $7 per share as a rough anchor. A quality analog franchise might reasonably trade at, say, 20 to 25 times mid-cycle earnings, which points to a value in the range of $140 to $175 per share. That is a bracket, not a target.

Now the discounted cash flow, which forces explicit assumptions. Take owner earnings near $5.7 billion, assume they grow at a moderate long-run rate as the new capacity comes online, and discount them back at the return you require. The mechanics are laid out in discounted cash flow; the point here is the discipline, not the decimals.

Figures are illustrative, built on Texas Instruments data as of July 2026, and rounded. The two methods overlap in a range roughly from the $130s to the $190s per share. That overlap is the useful output: not a single number, but a band both methods agree is defensible. Where they diverge would flag the assumption worth debating, which is exactly what a triangulation is for. The wider point, that value is a range rather than a point, is the heart of what is intrinsic value.

Step four: demand a margin of safety

The fourth step is to insist on a discount to that value, because every input above is an estimate that can be wrong. This is the margin of safety, and it is what separates investing from forecasting. Center the range on a base case near, say, $160 per share. A margin of safety of one-third would mean paying no more than about $105 to $110. That buffer absorbs the errors your estimate almost certainly contains: the wrong maintenance-capital figure, a growth rate that disappoints, a cycle that turns harder than expected.

The discount is not timidity; it is arithmetic humility. Recall from the earlier steps how many judgments fed the value: mid-cycle earnings, the maintenance-capital split, the growth rate, the discount rate. A reasonable person could move any of them and shift the value by a third. The margin of safety is the price you pay to be approximately right rather than precisely wrong, and the discipline is developed in margin of safety. The larger the uncertainty, and a cyclical business carries plenty, the wider the discount you should demand.

Step five: compare with the price and decide

The final step is the comparison, and it is where the decision becomes yours. In July 2026 Texas Instruments traded near $303 a share against fiscal 2025 earnings of $5.45, a trailing price-to-earnings multiple of about 56 on trough earnings, or roughly 43 times the mid-cycle figure of $7. That price sits above the triangulated value range and well above a price that would offer the margin of safety described in step four.

Read that carefully, because it is a statement about the current price against one set of estimates, not a verdict. The exercise says the market is pricing Texas Instruments for a strong recovery in earnings and continued growth from the new capacity, which may well arrive; the company has grown through many cycles before. Past results do not predict future returns. What the five steps give you is not an instruction but a structure: a defensible value range, an explicit list of the assumptions behind it, and a clear view of how much optimism the price already embeds. Whether that price is one you are willing to pay depends on how likely you find the recovery, how wide a margin of safety you require, and how long you intend to hold. Two careful investors can run these identical five steps and reach opposite conclusions, and that is normal.

Where to go from here

You now have a repeatable method: quality first, owner earnings second, triangulation third, margin of safety fourth, price last. Run it on any business you are studying, and write the assumptions down as you go, because the discipline of stating them is half the value. From here, turn the output into a written argument in building an investment thesis, pressure-test the downside in identifying key investment risks, then open the live Texas Instruments statistics on Tenet and start plugging in your own numbers.