Valuation answers one question: is this stock cheap, fair, or expensive for what you get? There's no single magic number — you triangulate with a few complementary tools.
Multiples: quick relative checks
| Multiple | What it compares | Watch out for |
|---|---|---|
| P/E | Price to earnings | Distorted by one-off profits and debt |
| P/S | Price to sales | Ignores whether sales are profitable |
| P/B | Price to book value | Less useful for asset-light firms |
| EV/EBITDA | Whole-firm value to operating cash earnings | EBITDA ignores capex and is easy to flatter |
A multiple only means something in context — versus the company's own history, its peers, and its growth rate. A P/E of 30 can be cheap for a fast grower and expensive for a no-growth utility.
Discounted cash flow (DCF): intrinsic value
A DCF estimates value from the cash a business will generate, discounted back to today at a rate that reflects risk (the WACC). It forces you to be explicit about growth, margins and reinvestment — its weakness is that small input changes swing the answer, so treat it as a range, not a point.
Example: two firms both trade at a P/E of 18. One grows earnings 3% a year, the other 12%. The faster grower is arguably the cheaper stock despite the identical multiple — this is the idea behind the PEG ratio (P/E ÷ growth).
Margin of safety
Because every estimate is uncertain, disciplined investors buy only when price sits comfortably below their estimate of value. That cushion — the margin of safety — protects you when the future doesn't match the forecast.
