Stock valuation scenarios, explained
Understand bear, base and bull valuation scenarios with a worked earnings example, explicit assumptions and the limits of a price estimate.
A valuation scenario asks: if these business assumptions hold, what value would this method imply? It makes uncertainty visible by changing the inputs. A scenario is not a prediction, and a range is not automatically a confidence interval.
A worked earnings example
For a fictional profitable company, assume you are estimating a share value at the end of the next fiscal year. Use diluted earnings per share for that same year and an assumed price-to-earnings multiple. The calculation is earnings per share × P/E multiple = implied share value.
| Scenario | EPS | P/E | Implied share value |
|---|---|---|---|
| Bear | $2.00 | 12 | $24 |
| Base | $3.00 | 18 | $54 |
| Bull | $4.00 | 24 | $96 |
These are invented inputs, not current company data or price targets. The outputs are values under the assumptions at the stated future horizon, not discounted present values. Dividends, taxes and trading costs are not included. No scenario probabilities are assigned.
Explain what changes in the business
The bear case might assume weaker sales and lower margins. The base case might assume stable margins and modest demand. The bull case might assume stronger demand and improved operating leverage. Translate each story into revenue, expenses and diluted shares, then check whether the resulting earnings per share are plausible.
Do the same for the multiple. Explain why the market might pay more or less for those earnings. Growth, durability and financing risk can affect that judgment. Choosing a high EPS and a high multiple together compounds optimism; show both assumptions explicitly.
Test one assumption at a time
At fixed EPS of $3.00, multiples of 12, 18 and 24 produce $36, $54 and $72. At a fixed multiple of 18, EPS of $2.00, $3.00 and $4.00 produces $36, $54 and $72. This separates uncertainty about the business from uncertainty about the valuation multiple.
Know when this method breaks down
P/E is difficult to interpret when earnings are negative, unusually cyclical or distorted by one-off items. Share issuance can reduce EPS even when total profit grows. An enterprise-value method requires a different bridge to equity value; do not mix its inputs into this per-share calculation without explaining the change of method.
Check actual inputs against company filings in SEC EDGAR. Keep the horizon, currency and accounting definitions consistent. Our report example shows how the valuation fits alongside the bull and bear arguments.