I'm replacing this entire post (where I originally asked how the game calculated damage, since it didn't make a ton of sense) with the formula I came up with to reliably calculate skill damage. Perhaps someone has already posted this somewhere, but I couldn't find it on the Wiki. Maybe it warrants its own page in the Mechanics section, maybe not.
What can you do with this formula, and why should you care about it?
Quickly understand which sets of gear will give you more damage
Calculate how much more damage you'll do when upgrading weapons or armor/rings
Determine which item upgrades will provide the most bang for your gold
Figure out the # of upgrades required on each piece of gear to reach a given damage threshold (e.g., 1-shotting mobs or bosses vs. 2-shotting)
Example:
Imagine you had the two following sets of gear:
A 40M dmg warrior weapon and warrior gear that gave 6.4M physical power
A 34M dmg mage weapon and mage gear that gave 8.3M spell power
Which do you think would do more skill damage, and how big would the difference be?
If you said the warrior gear would do more skill damage because the wep has 15% more base dmg, you'd be wrong. If you felt that the mage set would actually do more damage because you multiplied the wep dmg by the spell power, you'd be right, but to the wrong degree. The mage set actually does 25% more damage than the war set, not 15% more as you might've thought if you just multiplied the values.
The formula:
(Physical Damage/1.5)*((Physical Power-Physical Damage)/350)*(1+(Skill Points*0.02))*(Skill Damage Modifier)
Stat Explanation:
Physical Damage and Physical Power can both be found on your character sheet.
Physical Power is calculated by adding the stats from your rings, chest, and helm to the power from your weapon. Given the rounding the game does on the stats page, manually adding your items' power together will result in more accurate calculations (which is likely to make a bigger difference at higher power levels).
Skill damage modifiers can be found on most skill pages, as most people on this wiki probably already know.
Anywho, let me know if anyone finds this inaccurate. I've tested it multiple times across various skills and everything has come out as expected.
Hope that helps!
Lost