Valuation Scoring – Is the Stock Rather Cheap or Expensive?

The Valuation label (Expensive / Fair / Cheap) shows whether the stock price is appropriate for its results and growth potential. Lower valuation multiples mean higher score – the company is "cheaper" relative to what it offers.

Why Valuation Matters

Even a great company can be a bad investment if you pay too much for it. And conversely – an average company at a good price may be a better choice than a star at an exorbitant price.

Valuation answers the question: How much am I paying for what I'm getting?

• For each dollar of profit
• For each dollar of cash flow
• For each dollar of revenue
• For each dollar of company assets

The less you pay per unit of "value," the better potential return (assuming the company maintains quality).

What We Evaluate

We use a combination of the most common valuation metrics, each offering a different perspective:

EV/EBITDA – Ratio of total enterprise value (Enterprise Value = market cap + debt − cash) to operating profit before depreciation. This metric is useful for comparing companies with different capital structures.

P/E – Classic indicator of how many dollars you pay for one dollar of annual profit. P/E of 15 means you pay 15 times the annual profit for the stock.

P/FCF – Similar to P/E, but uses Free Cash Flow instead of accounting profit. Important because some companies report profits but don't generate cash (and vice versa).

PEG – P/E divided by profit growth rate. Helps distinguish whether high P/E is justified by rapid growth. A growing company with P/E of 30 and 30% annual growth has PEG of 1, which is more acceptable than P/E of 30 with 10% growth.

P/S – Price to revenue. Useful especially for companies that aren't yet profitable or have temporarily low margins. Revenue is more stable and harder to manipulate than profits.

P/B – Price to Book Value (equity). Key metric for banks, insurance companies, and real estate firms where assets form the core of value.

Sector Differences

"Cheap" and "expensive" mean something different for each sector:

• Technology – Naturally higher valuations due to growth potential and high margins. P/E of 30 may be "fair" for tech, while for utilities it would be extremely expensive
• Financial sector – Key metrics are P/B and P/E. EV/EBITDA and P/FCF don't make sense here
• Real estate companies (REITs) – Instead of P/E we use P/FFO (Price to Funds from Operations), instead of EV/EBITDA then EV/FFO. FFO better reflects actual performance of real estate companies
• Cyclical sectors – Lower valuations are common due to results volatility
• Defensive sectors – Higher valuations for stability and predictability

Scoring evaluates each company within its sector, not absolutely.

How to Interpret Results

What to Watch For

• "Cheap" doesn't automatically mean "buy" – A stock may be cheap legitimately because the company faces problems or has poor prospects. Always combine with other scoring categories.
• "Expensive" doesn't automatically mean "sell" – The best companies in the world are often "expensive" because the market values their quality and growth potential.
• Negative profits – If a company has negative profits, P/E cannot be meaningfully calculated. Similarly, negative FCF makes P/FCF calculation impossible. In such cases, scoring omits these metrics and relies on others.

Metrics Considered