Valuation: How Much Is a Company Worth?

Intrinsic Value vs. Market Price

Every investing decision eventually comes down to one question: is this stock cheap, expensive, or about right? The market price is trivial to find — it's on your phone. The hard half is estimating intrinsic value: what the business is actually worth based on the cash it'll generate over its lifetime. Valuation is just the name for the process of guessing that second number as carefully as you can.

Benjamin Graham's line on this has survived nearly a century for a reason: "Price is what you pay. Value is what you get." When the price sits well below your estimate of value, you've got what Graham called a margin of safety — room for your estimate to be wrong and still come out fine. That single idea is basically the whole philosophy of value investing.

Relative Valuation: Multiples

The fast way to value something is to compare it to its peers using multiples — ratios that scale price against some measure of the underlying business, so companies of wildly different sizes become comparable.

Price-to-Earnings (P/E) is the one you'll see most:

P/E = Stock Price / Earnings Per Share

A P/E of 20 means you're paying $20 today for every $1 the company earned this year. The higher the number, the more growth the market expects. The S&P 500 has historically averaged around 15–16×; during genuine tech booms it's pushed past 30×. A hot growth name like NVIDIA might trade at 60–100× earnings, while a slow, mature "value" stock sits at 8–12×. It's not that one is right and one is wrong — they're pricing in different futures.

The catch: EPS is an accounting number, and accounting numbers can be nudged. Negative earnings make P/E meaningless outright. And comparing a tech company's P/E to a utility's tells you almost nothing, since the two industries have completely different structural growth rates baked in.

EV/EBITDA is the multiple professionals reach for more often:

EV = Market Cap + Total Debt − Cash
EV/EBITDA = Enterprise Value / EBITDA

It doesn't care how a company is financed (debt-heavy or debt-free, the comparison still works) and it's measured before taxes, which makes it usable across countries with different tax codes. Typical ranges run 6–10× for mature industries, 3–6× for capital-heavy businesses like manufacturing, and 15–25× for high-growth tech.

Two more worth knowing: Price-to-Sales, used for companies that don't have profits yet (tech startups routinely trade at 5–20× revenue), and Price-to-Book, which compares price to net assets. A P/B under 1 means the stock trades below its own liquidation value — sometimes a real bargain, sometimes a warning sign that the market knows something you don't.

Discounted Cash Flow

Multiples only tell you relative value — cheap or expensive compared to something else. A DCF tries to answer the harder question directly: project the company's future free cash flows, then discount each one back to what it's worth in today's dollars.

Intrinsic Value = Σ [FCF_t / (1 + r)^t] + Terminal Value

FCF_t is the free cash flow expected in year t, r is your discount rate (usually the weighted average cost of capital), and terminal value stands in for every dollar of cash flow beyond your forecast window — typically 5 to 10 years out. It's usually estimated with the Gordon Growth Model:

Terminal Value = FCF_final × (1 + g) / (r − g)

where g is a conservative long-run growth rate, often pegged around 2–3% — roughly GDP growth, since no company can outgrow the economy forever.

That sensitivity is the honest weakness of the whole method. Nudge the discount rate from 10% to 12%, or the terminal growth rate from 3% down to 2%, and your output can move 30–50%. There's an old Wall Street joke that DCF really stands for "Don't Count on Figures" — analysts are at least as likely to use it to justify a number they already believed as to actually discover one. The right way to use it is alongside multiples, not instead of them: stress-test your assumptions and think in ranges, not a single confident point estimate.

A Simple Framework

1. Understand the business — how does it actually make money, and how defensible is that?
2. Check the trajectory — is revenue growing, and are margins expanding or shrinking?
3. Look at the balance sheet — could this company survive a bad year? Is the debt load manageable?
4. Compare multiples to peers — trading at a premium or a discount, and can you explain why?
5. Sanity-check with DCF — do those multiples imply a growth rate you'd actually bet on?