Valuation, the process of determining how much a corporation is really worth, is always partly objective and partly subjective. There are several different methods commonly used, but there’s going to be some guesswork involved no matter what.

The most common way to value a company is according to its earnings, which are usually calculated according to earnings per share: you simply divide the company’s net profit by the number of shares it has. (You want the earnings per share value because that makes it is a standard measure to reflect each piece of ownership in the company). You can also value a corporation according to its assets – that is, if a company paid off all its debts and added up everything of value it had left, how much money would that amount to? Another technique involves measuring cash flow, or how much money passes through a company in various transactions over the course of a quarter or fiscal year (not counting predetermined expenses like taxes and interest).

Investors compare “like” companies, as defined by industry, growth rates, or geography, based on their Price to Earnings (PE), Price to Cash Flow, or Price to Growth (PEG) ratios. Price to Growth is used for companies like Facebook, that are yet to have earnings! Higher quality companies get higher ratios, or valuations, versus lower quality earnings.  Historically, the average PE within the S&P 500 since 1936 is a PE of about 15.8x.

These are the most basic techniques, but there are many alternative techniques that are used or that some people claim are more effective. And ultimately, no matter which method you use, the “true value” of a company is only something that can ever be approximated; it’s more of an ideal than a calculable number.