Stock Valuation Factors Individual stocks are typically valued by estimating what the business is worth, then comparing that value to the current share price. There are two big questions: 1. What is the company likely to earn or generate in the future? 2. What are investors willing to pay for that stream of cash flow or profit? Key ways stocks are valued: - Price to earnings ratio PE - Compares share price to earnings per share - Useful for profitable companies - Lower can mean cheaper, but not always - Price to sales ratio PS - Uses revenue instead of profit - Helpful for companies with thin profits or fast growth - Price to book ratio PB - Compares market value to accounting book value - More useful for banks, insurers, and asset-heavy companies - Discounted cash flow DCF - Estimates future cash flows and discounts them back to today - More detailed, but depends heavily on assumptions - Enterprise value to EBITDA EV EBITDA - Looks at the value of the whole business relative to operating earnings - Good for comparing companies with different debt levels What to watch when evaluating a stock: - Revenue growth - Is the company growing sales consistently? - Profit margins - Gross margin, operating margin, net margin - Tells you how efficiently the company turns sales into profit - Earnings quality - Are profits real and recurring, or boosted by one-time items? - Cash flow - Free cash flow is especially important - A company can show accounting profit but still struggle for cash - Debt levels - Too much debt increases risk, especially if rates are high - Valuation relative to peers and history - Compare against similar companies and the stock’s own past multiples - Competitive advantage - Brand, network effects, switching costs, patents, cost structure, etc. - Industry outlook - Some sectors grow faster or face more disruption than others - Management quality - Capital allocation, execution, honesty, and consistency matter a lot - Return on capital - ROE, ROIC, or ROA can show how effectively management uses money - Dilution - If the company keeps issuing shares, your ownership can shrink - Risk factors - Regulation, customer concentration, lawsuits, cyclical demand, currency exposure A simple way to think about it: A stock is attractive if the business is strong, growing, and reasonably priced relative to its future cash flow. A useful beginner checklist: - Is revenue growing? - Are profits and cash flow growing? - Is debt manageable? - Is the valuation reasonable versus peers? - Does the company have a durable moat? - Is management reinvesting capital well? If you want, I can also give you: - a beginner-friendly stock valuation checklist, - an example using a real company, or - a simple explanation of PE, PEG, and DCF.