Valuation · 1

What is a company worth?

The price is what you pay for a share; the value is what the business is worth to you. There are two families of tools: multiples (quick comparisons) and the DCF (a full model of future cash).

👴 In one sentence A business is worth all the cash it will ever give its owners — and a dollar far in the future is worth less than a dollar today.

Imagine the founders of Rat Bakery offer to sell you shares at $90 per share. With 10,000 shares, the whole bakery is priced at $900,000. This is its market capitalisation (market cap) = price × number of shares.

Part 1 — Multiples

Valuation multiples Rat Bakery at $90 per share

P/E = 90 ÷ 7.2012.5x

Price-to-earnings: you pay $12.50 for each $1 of yearly profit. If profit never changed, you'd need 12.5 years to "earn back" the price.

Earnings yield = 7.20 ÷ 908.0%

The P/E turned upside down. Easy to compare with a savings account or bond yield.

P/S = 900,000 ÷ 500,0001.8x

Price-to-sales. Useful for young companies that don't make a profit yet.

P/B = 900,000 ÷ 175,0005.1x

Price-to-book: price vs. equity on the balance sheet. Most used for banks and insurers.

Enterprise value = 900,000 + 100,000 − 60,000940,000

EV = market cap + debt − cash. The price to buy the whole business, including taking over its debts and keeping its cash.

EV/EBITDA = 940,000 ÷ 130,0007.2x

Compares the whole-business price with operating earnings. Fair across companies with different amounts of debt — that's why buyers of entire companies love it.

FCF yield = 58,000 ÷ 900,0006.4%

Free cash flow per $1 you pay. Higher = more cash for your money.

Dividend yield = 28,800 ÷ 900,0003.2%

The cash you'd actually receive each year as a percentage of the price.

⚠️ A low P/E is not automatically "cheap" A P/E of 12.5 can be a bargain for a growing company or expensive for one whose profits are about to fall. Multiples only make sense when compared with the company's own history, with similar companies, and together with growth. That's why our analysis pages show each company's multiples over 10 years rather than a verdict.

Next: the discounted cash flow (DCF)

Multiples compare a price with today's results. A DCF goes further: it values a business from the cash it may produce in the future, using the cost of equity, cost of debt, WACC, present value and terminal value. It has its own lesson, with every formula explained part by part.

Go to the DCF lesson →

✏️ Check yourself: why does a higher discount rate give a lower value?

Show the answer

Because you're demanding a higher return. To get more return from the same future cash, you must pay less for it today. Riskier businesses therefore get higher discount rates and lower values.