🧮 How Valuation Works

Valuation can be approached in different ways, but it often comes down to comparing a company’s price to its fundamentals — like earnings, sales, or growth potential.

Here are some common methods:

• Price-to-Earnings (P/E) Ratio: One of the simplest tools. It compares the stock price to the company’s earnings per share (EPS). A high P/E might mean the stock is expensive — or that investors expect big growth. A low P/E could suggest it's undervalued — or that growth is slowing.
• Price-to-Sales (P/S) Ratio: Useful for companies that aren’t profitable yet. It compares stock price to total revenue. Lower ratios may suggest better value.
• Discounted Cash Flow (DCF): A more advanced method that estimates what the company’s future cash flow is worth in today’s dollars. It’s detailed, but sensitive to assumptions about growth and interest rates.
• Comparable Company Analysis: Looks at similar companies (in the same industry or size) to see how the company stacks up. It’s like checking what other houses in the neighborhood are selling for.

🔍 Why Valuation Matters

Valuation helps investors:

• Decide when to buy or sell: A great company can still be a bad investment if the price is too high.
• Avoid hype: A soaring stock may be exciting, but if it’s extremely overvalued, a pullback could follow.
• Spot opportunities: Undervalued stocks (trading below what they’re worth) can offer solid returns — if the market eventually catches on.

However, valuation isn’t an exact science. Different investors use different methods, and markets don’t always behave rationally in the short term.

📈 Real-World Examples

• In 1999, many internet stocks were trading at sky-high valuations with little or no profit — leading to the dot-com bubble and crash.
• In 2008–2009, many solid companies became undervalued due to panic selling — those who bought in saw strong long-term gains.
• Today, some tech stocks trade at high P/E ratios due to strong growth expectations, while others in mature industries trade at lower valuations with stable dividends.

🧠 The Bottom Line

Valuation is about asking whether a stock’s price makes sense, given the company’s current performance and future potential. It's not just about finding cheap stocks — it's about finding good value.

Investors who understand valuation are better equipped to make smart, strategic decisions — and avoid getting caught up in market hype.