The Complete Stock Valuation Cheat Sheet
From first principles to professional-grade models. Every ratio, formula, red flag, and mental model you need to value any stock - with clear explanations for beginners and deep nuance for experts.
Before opening a spreadsheet or looking at a single ratio, ask these three questions in order. They determine which metrics matter and how to weigh them.
Is It Cheap?
Price (Valuation)
What are you paying relative to earnings, assets, revenue, or cash flow? Cheap relative to what - history, peers, or intrinsic value?
Key metrics:
- P/E, P/FCF, P/B
- EV/EBITDA, EV/EBIT
- FCF Yield
- Margin of Safety
Is It Quality?
Business Excellence
Does the business generate exceptional returns on capital? Does it have a durable competitive advantage? Does it compound value over time?
Key metrics:
- ROIC vs WACC
- Gross & Operating Margins
- FCF Conversion Rate
- ROE (DuPont decomposed)
Is It Safe?
Financial Health
Can the business survive a downturn? Is the balance sheet honest? Are the financials trustworthy? Financial distress is permanent impairment.
Key metrics:
- Piotroski F-Score
- Altman Z-Score
- Beneish M-Score
- Net Debt / EBITDA
Price multiples compare the stock price to a per-share business metric. They are fast, comparable, and widely used - but context-dependent. Never use a single ratio in isolation.
P/E - Price-to-Earnings
Share Price / Earnings Per Share (EPS)
Trailing P/E (last 12 months) | Forward P/E (next 12 months) | Normalized P/E (avg 5-10yr earnings)
Forward P/E is more relevant but relies on analyst estimates. Normalized P/E removes cyclicality. A low P/E on peak earnings is a trap - check where we are in the cycle.
P/B - Price-to-Book
Market Cap / Book Value of Equity
P/TBV (tangible book - strips intangibles) is preferred for banks
P/B below 1 can mean distress OR genuine undervaluation. Pair with ROE: a P/B of 1.5 with ROE of 20% is cheap; P/B of 0.8 with ROE of 3% is a trap.
P/S - Price-to-Sales
Market Cap / Annual Revenue
EV/Revenue is more accurate (accounts for debt)
Always pair P/S with gross margin. A P/S of 5 on 80% gross margins (SaaS) is different from P/S of 5 on 20% margins (retail). High P/S requires high margin expansion potential.
P/FCF - Price-to-Free Cash Flow
Market Cap / Free Cash Flow
FCF = Operating Cash Flow - Capex. Use owner earnings for Buffett-style analysis.
P/FCF is often more reliable than P/E because it strips out non-cash items and working capital games. A company with P/E of 30 but P/FCF of 18 is actually reasonable.
FCF Yield
Free Cash Flow / Market Cap × 100
Levered FCF yield (after debt service) is more conservative
FCF yield is the most direct comparison to bond yields. Buffett has said he buys equities when FCF yield significantly exceeds long-term bond rates. This is the "opportunity cost" sanity check.
PEG - Price/Earnings-to-Growth
P/E Ratio / Annual EPS Growth Rate (%)
Forward PEG uses projected EPS growth; some use 5Y EPS CAGR
PEG is only as good as the growth estimate. If growth slows, PEG explodes. Peter Lynch used PEG extensively but always stress-tested the growth assumption by 30-50%.
Dividend Yield
Annual Dividends Per Share / Share Price × 100
Forward yield (next declared) vs trailing yield; Total yield = dividend + buyback yield
A 9% yield is often a "yield trap." Always check: (1) payout ratio vs FCF (not net income), (2) dividend growth rate, (3) debt coverage. A 3% growing dividend beats a 7% dividend being cut.
Earnings Yield
EPS / Share Price × 100 (inverse of P/E)
Used in Greenblatt Magic Formula alongside ROIC
Earnings yield > 10-year treasury yield = equity looks cheap vs bonds. This relationship breaks during extreme rate environments but is a useful starting framework.
EV/EBITDA
Enterprise Value / EBITDA
EV = Market Cap + Total Debt + Minority Interest - Cash & Equivalents
Preferred in M&A because the acquirer takes on all debt. Also useful when comparing companies with different tax jurisdictions or capital structures. Weakness: ignores capex (maintenance capex can eat all EBITDA).
EV/EBIT
Enterprise Value / EBIT (Operating Income)
EV = Market Cap + Debt - Cash
For capital-light businesses (software, consulting), EV/EBIT and EV/EBITDA are similar. For capital-heavy businesses, EV/EBIT is significantly more conservative and honest.
EV/FCF (EV/FCFF)
Enterprise Value / Free Cash Flow to Firm
FCFF = EBIT(1-tax) + D&A - Capex - Change in Working Capital
EV/FCF > EV/EBITDA for capital-heavy companies because it accounts for capex. Buffett's "owner earnings" is a version of this: Net Income + D&A - maintenance capex.
EV/Revenue
Enterprise Value / Annual Revenue
More complete than P/S because it includes debt obligations
A SaaS company at 8x EV/Revenue with 80% gross margins and 40% growth can be cheap. A software reseller at 3x EV/Revenue with 20% margins is expensive. Revenue multiples require margin context.
EV/Invested Capital (EV/IC)
Enterprise Value / Invested Capital
IC = Equity + Debt - Cash (the capital deployed in the business)
EV/IC = ROIC / WACC is the theoretical equilibrium. If a company has ROIC of 25% and WACC of 10%, fair EV/IC is 2.5x. Higher = growth premium. Lower = the market expects ROIC to revert.
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