Valuation: P/E, P/S, EV/EBITDA and PEG

Price alone says nothing

A $500 stock is not "more expensive" than a $20 one. The price is the price of one share, and share counts differ. The full price of a company is its market cap: price × number of shares.

Recall Nur Tech from the Fundamental analysis basics lesson: 10m shares, net income $20m, revenue $100m, shareholders' equity $100m, cash $40m, debt $10m. Let the share price be $50. So the market values the whole company at 10m × $50 = $500m.

Is that a lot or a little? To answer, we compare the price with what the business earns — profit, revenue, cash flow. These ratios are called multiples. They answer the question "how many dollars am I paying for $1 of profit (or sales)?".

Why does it matter? An investor's return comes from two sources: the business growing (EPS growth) and the change in the price the market puts on that business (the multiple). Buy a great company at a very high multiple and, even if the business grows, a shrinking multiple can eat your return.

P/E — price relative to earnings

P/E = share price ÷ EPS (or market cap ÷ net income — same result). Nur Tech: $50 ÷ $2.00 = 25. The market pays $25 for each $1 of annual profit. Put differently, if profit stayed flat it would take 25 years to "earn back" the price.

Trailing vs forward P/E

Which EPS you divide by matters:

• Trailing P/E (TTM) — the actual EPS of the last 12 months. Precise, but about the past.
• Forward P/E — analysts' EPS estimate for the next 12 months or year. It looks ahead, but estimates can be wrong.

The price is the same — $50. Analysts expect Nur Tech's EPS to grow to $2.50 next year and $3.00 the year after. So trailing P/E is 25, forward P/E 20 and two years out ~16.7. For a fast-growing company the forward P/E is well below the trailing one. If the forward P/E is higher than the trailing, analysts expect profit to fall — that deserves a closer look.

The screener shows both. Comparing them is a useful habit: the bigger the gap, the more the price relies on forecasts.

Other multiples: the Nur Tech example

P/E does not work in every case. When there is no profit, when profit is distorted by a one-off item or when the company carries a lot of debt, you need other ratios.

• P/S = market cap ÷ annual revenue. Nur Tech: $500m ÷ $100m = 5. The main yardstick for young companies that are not yet profitable. But P/S knows nothing about margins: a P/S of 5 means one thing for a company with a 20% net margin and something completely different at a 2% margin.
• P/B = market cap ÷ shareholders' equity (book value). Nur Tech: $500m ÷ $100m = 5. Useful where assets are the main wealth (industrials, materials). For brand and software companies the main wealth does not show on the balance sheet, so P/B means little.
• P/FCF = market cap ÷ free cash flow. If Nur Tech's FCF is $20m: $500m ÷ $20m = 25. Many investors trust it more than P/E, because cash flow is harder to "dress up" with accounting.
• EV/EBITDA. Enterprise value (EV) = market cap + debt − cash = $500m + $10m − $40m = $470m. That is the price of buying the whole business including its debt and cash. EBITDA = operating income + depreciation and amortisation = $25m + $5m = $30m. EV/EBITDA = $470m ÷ $30m ≈ 15.7.