Valuation Basics
Valuation tries to answer a single question: what is this business worth, and what am I being asked to pay? This lesson walks through the main tools.
Why this matters for beginners
Price and value are different. Without a sense of value, you can only react to price, which is how most beginners get hurt.
Main explanation
Common tools: P/E, EV/EBITDA, price-to-sales, discounted cash flow (DCF), and comparable companies. Each one has blind spots.
No model is precise. The goal is a reasonable range, not a single number. If your DCF gives a value of '$237.42', you're fooling yourself. The inputs are estimates.
Margin of safety means buying below your estimate of fair value so that being wrong on the inputs doesn't cost you money.
Different businesses suit different methods: stable cash generators fit DCF well; early-stage businesses are often valued on revenue multiples or peer comparisons.
Example using a real company
ASML, MSFT and AAPL all trade at very different multiples. The point is not which is 'cheap', it's understanding what each multiple is asking you to believe.
- →A DCF says fair value is $80–$120 per share. Today's price is $70 → meaningful margin of safety. Today's price is $140 → none.
- →Two companies both at P/E 25: one growing 20%/yr, one growing 3%/yr. The same multiple means very different things.
Common beginner mistakes
- ✕Treating a single DCF number as fact.
- ✕Comparing multiples across very different business models.
- ✕Ignoring balance sheet risk (debt, dilution) when looking only at P/E.
Key terms
- DCF
- Discounted cash flow, estimates value as the sum of future cash flows discounted to today.
- EV/EBITDA
- Enterprise value ÷ earnings before interest, tax, depreciation and amortization.
- Margin of safety
- Buying below your estimate of fair value as a buffer against being wrong.
Key takeaways
- 01Valuation is a range, not a price.
- 02Use multiple methods to triangulate.
- 03Margin of safety matters.
Check yourself
- 01A DCF gives a precise correct value.
- 02Margin of safety means buying above fair value.
- 03Comparable-company analysis ignores the business model.
Try the concept on a real company
Run MSFT, AAPL, NVDA, and ASML in the Analyzer and compare the valuation notes for each. What different futures is each price implying?
Educational examples only. Not buy or sell recommendations.