4 Quick Valuation Methods Every Investor Should Know

What is the biggest struggle most investors face when investing?

Determining what a company is worth?

Funnily, we spend more time (typically) trying to figure out the best price for a refrigerator than we do for investments.

Today, let’s change that.

Let’s look at four ways to determine whether a company is worth a deeper look quickly.

The best way to find a company’s value is to use a DCF (discounted cash flow) model. But in some cases, we are in a hurry, or the company is at a stage where this doesn’t work.

Unfortunately, there are no one-size-fits-all valuation methods (sorry). We do need to consider the life cycle and other factors. But I digress….

Okay, we can use metrics or ratios to value a company quickly.

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The four most common are:

• P/E Ratio
• P/S Ratio
• FCF Yield
• EV/EBIT

These can give us insights into a wide range of companies and situations. They are also simple to understand and use.

Caution: Ratios and metrics are shortcuts for valuation, not the full-blown idea.

Last note before diving in: valuation is as much science (numbers) as art. And what one might find expensive, others might find reasonable or cheap.

To put this into practice, let’s put Amazon through its paces.

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First up P/E Ratio

Ratio refresh: P/E Ratio = Price per share/earnings per share.

To cheat, you could use a financial website (psst. Finchat.io) to find these data. We will use the forward P/E or NTM (next twelve months). Side note: There are lots of acronyms in finance, huh?

So, looking at Amazon’s P/E Ratio, we see a NTM ratio 35.74.

Remember, a good ratio is anything below 25ish, but Warren Buffett likes less than 15.

So, at first blush, it might be expensive.

Amazon is an interesting case study in that it has many business segments, such as AWS and retail. However, it also invests in Rivian, and the investment results appear on the income statement. What does Dave mean?

The value of the Rivian investment rises and falls, impacting Amazon’s earnings, and the investment has nothing to do with operations. So, the P/E ratio doesn’t carry as much water for an Amazon valuation.

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Second, P/S Ratio

Ratio refresh: P/S Ratio = Price per share / Sales per share.

Finchat tells us the P/S ratio equals 2.9, with a good range between retail companies 1 and 2 and tech of less than 3 looking good.

Because Amazon falls into both camps, could we call this fair value?

Or Undervalued?

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Third, FCF Yield

Ratio refresh: FCF Yield = FCF per share / Price per share.

Free cash flow is the lifeblood of every business. And the higher the yield, the better.

Amazon clocks in with a 2.9%, with analysts expecting the yield to grow:

• 2025 = 3.7%
• 2026 = 4.9%
• 2027 = 5.95

So why the disparity?

Microsoft, Google, and Amazon are racing to grab as much land as possible in the AI race. The expansion costs drive down free cash flow, but as the costs reduce over time, free cash flow grows.

I like companies above 5%, but Amazon offers a special case, like the P/E ratio.

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Last up, EV/EBIT Ratio

Ratio refresher: EV/EBIT = Enterprise value / EBIT (Operating income)

The EV/EBIT ratio is one of Joel Greenblatt’s favorites and is part of his “Magic Formula.” (Inverted EBIT/EV).

I like that the ratio considers the company’s debt, whereas the others above don’t.

Amazon’s forward ratio is 29.7, which, compared to its cousin EV/EBITDA, is about right for a tech company.

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So overall, we have Amazon producing the following:

• P/E ratio = 35.7
• P/S ratio = 2.9
• FCF Yield = 2.9%
• EV/EBIT ratio = 29.7

Overall, it’s not bad, and it seems worth diving deeper to see if Amazon offers an opportunity.

Another good practice is to compare these metrics/ratios to others, such as Google and Microsoft.

Does this seem fun? Did you enjoy this?

Andrew and I are offering you the opportunity to do this with any company you wish. As part of a subscription to Value Spotlight, Andrew and I host a Valuation Hackathon (cool name, huh?), and we have another session coming Thursday 1 pm E, the 19th.

Not only do you get Andrew’s amazing monthly picks (well, they’re worth the read, and he is kicking some serious booty right now, 31.8% YTD, compared to 25.8% for the S&P), but we also include our DCF model spreadsheets so you can learn more about valuation.

We are looking forward to seeing you there.

Thanks,

Dave Ahern.