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Step 9 of 11

How to think about valuation

What investors pay today compared with what the business produces, and why.

Click any word with a dotted underline to see what it means.

Looking at the business tells you what the company does and how it has performed. Valuation adds the price: how much investors are paying for those results today. The same company can be priced very differently at different times.

What to look at

  • : the share price compared with earnings per share over the .
  • : the market value compared with the last 12 months of sales, useful when profit is negative or unusual.
  • History: where today's P/E sits within the company's own range over the last five years.
  • Peers: how the company's ratios compare with the .

Questions to ask yourself

  • What would have to happen for today's price to make sense? For example, how fast would profit need to grow?
  • Is the ratio unusual because the price moved, or because earnings changed? A one-time drop in profit can make P/E jump.
  • Are the companies I'm comparing really similar businesses?

Keep in mind

A high ratio doesn't mean a stock will fall, and a low one doesn't mean it will rise. Ratios describe what investors are paying; they don't tell you what will happen next. When earnings are negative, P/E can't be calculated, and StockLab shows N/A with an explanation.

On StockLab

P/E is in the Simple View. The Advanced View adds P/S and a Valuation context card with the five-year P/E range.