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Valuation
Valuation
★★★★★
Valuation is the process of estimating a companys reasonable value using relative or intrinsic methods.
Explanation
Common valuation methods include relative valuation such as PE, PB, PS, and PEG, and intrinsic valuation such as DCF. Valuation depends on assumptions, so the goal is not false precision but a reasonable range and a clear understanding of what the market has priced in.
✓ When to Use
- • Judge whether a stock is overvalued or undervalued before buying
- • Review whether current price still matches fundamentals while holding
- • Decide whether market pricing already reflects expected value
✗ Not For
- • Not suitable as the only basis for an investment decision.
- • Less reliable when financial data is distorted by one-off events.
- • Hard to compare directly across very different industries or business models.
⚠ Common Mistakes
- ▸ Relying on a single valuation metric
- ▸ Ignoring assumptions behind a model
- ▸ Pursuing precise numbers while forgetting uncertainty
ValuationBeginner