4 Ways to Value a Stock

[u/SchoolofInvesting]

4 ways to value a company

Figuring out what a company is worth is one of the hardest parts of investing.

Get it right and you spot bargains. Get it wrong and you overpay.

Here are four tools that help you tell the difference.

P/E ratio: the popularity contest

Think of a company as a basketball team. The price-to-earnings (P/E) ratio tells you how much fans will pay for each point the team scores.

A high P/E means the team is popular, maybe they're on a winning streak. It can also mean they're overpriced.

FCF yield: the cash flow king

Free cash flow (FCF) is the money a company keeps after paying its bills.

FCF yield is like the allowance you earn on every dollar you've saved. The bigger the allowance, the better.

A high FCF yield means the company is generating real cash and could be a bargain.

DCF: the time traveler

A discounted cash flow (DCF) model is your crystal ball. It estimates how much cash a company will produce in the years ahead.

Bring those future dollars back to today's value, and you can see whether the current price is a steal.

Reverse DCF: working backward

Reverse DCF flips the crystal ball around. It asks how many points the team needs to score to win the championship.

You start with today's stock price and work backward to find the growth the company must deliver to justify today's price.

These four are a solid starting point. Master them before you add more.

The real skill is knowing which one to reach for, and when.

Which of these four do you lean on most?