Valuation

Valuation compares the price of a company with what the business produces.

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

Valuation asks a simple question: how does the price of a company compare with what the business earns, sells or owns? An excellent business and a sensible price are two different things, and valuation is the part that looks at the price.

Common ways to put a price in context

• P/E ratio: the share price compared with the company's profit per share.
• P/S ratio: the company's market value compared with its yearly sales. Useful when there is no profit yet.
• Comparisons: with the company's own past values, and with other companies in the same sector.

What a high or low number can mean

A high P/E often means investors expect profit to grow a lot in the future. A low P/E can mean they expect profit to stay flat or fall, or that they see risks ahead. Neither view is automatically right. Expectations can turn out to be too optimistic or too pessimistic, and much of the risk and opportunity in investing comes from that gap.