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Introduction to Equity Valuation

Valuation asks what a company is worth, as distinct from what it currently costs. Two families of method, with very different characters.

Relative valuation: multiples

Compare a company to its peers on a ratio.

P/E=share priceearnings per share\text{P/E} = \frac{\text{share price}}{\text{earnings per share}}

Also common: price-to-book, price-to-sales, and EV/EBITDA, which uses enterprise value (market cap plus net debt) and is therefore comparable across companies with different leverage.

Multiples are fast and grounded in actual market prices. What they hide is that a multiple is not a verdict, it is a question. A P/E of 40 against a sector average of 15 does not mean overvalued; it means the market expects much faster growth, and the analysis is whether that expectation is reasonable.

The other limitation: multiples are relative. If an entire sector is mispriced, comparing within it tells you nothing.

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