# Valuation Basics > Valuation estimates what a business is worth. Learn intrinsic vs relative valuation, the main multiples, how growth and risk affect value and common mistakes. Source: https://learn.tradelabsai.com/fundamentals/valuation-basics/ Track: Fundamental Analysis · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Valuation Basics", https://learn.tradelabsai.com/fundamentals/valuation-basics/ Valuation is the process of estimating what a business, or a share of it, is worth. A stock's price is what you pay; its value is what you get. Traders and investors use valuation to judge whether a stock is cheap or expensive, to understand what the market is assuming about the future, and to set expectations for returns. There is no single correct value, only estimates based on assumptions, but a disciplined approach helps avoid paying far too much. ## Two main approaches | Approach | Idea | Main tools | Lesson | |---|---|---|---| | Intrinsic (absolute) valuation | Value equals the present value of future cash flows | Discounted cash flow, dividend discount models | [DCF Valuation](https://learn.tradelabsai.com/fundamentals/dcf-valuation/) | | Relative valuation | Compare with similar companies or the company's own history | P/E, EV/EBITDA, P/S, P/B | [Comparable Companies and Precedent Transactions](https://learn.tradelabsai.com/fundamentals/comparable-companies/) | Most professionals use both: intrinsic valuation to understand what drives value, and multiples to check against the market. ## The core idea A company is worth the cash it will generate for its owners over its life, discounted back to today because money in the future is worth less than money now and because the future is uncertain. ``` value = Σ expected cash flow in year t / (1 + discount rate)^t ``` Three things drive value: 1. **Cash flow today.** 2. **Growth** in that cash flow. 3. **Risk,** reflected in the discount rate. See [WACC and Cost of Equity](https://learn.tradelabsai.com/fundamentals/wacc-and-cost-of-equity/). ## Common valuation multiples | Multiple | Formula | Best for | Lesson | |---|---|---|---| | P/E | Price / EPS | Profitable companies | [P/E and Forward P/E](https://learn.tradelabsai.com/fundamentals/p-e-and-forward-p-e/) | | PEG | P/E / growth rate | Comparing growth companies | [PEG Ratio](https://learn.tradelabsai.com/fundamentals/peg-ratio/) | | EV/EBITDA | Enterprise value / EBITDA | Comparing companies with different debt | [EV/EBITDA and EV/Sales](https://learn.tradelabsai.com/fundamentals/ev-ebitda-and-ev-sales/) | | EV/Sales, P/S | Value / revenue | Unprofitable or early stage companies | [Price to Sales and Price to Book](https://learn.tradelabsai.com/fundamentals/price-to-sales-and-price-to-book/) | | P/B | Price / book value | Banks, insurers, asset heavy firms | [Price to Sales and Price to Book](https://learn.tradelabsai.com/fundamentals/price-to-sales-and-price-to-book/) | | Dividend yield | Dividend / price | Income stocks | [Free Cash Flow Yield and Dividend Yield](https://learn.tradelabsai.com/fundamentals/dividend-yield/) | | FCF yield | Free cash flow / market cap | Cash generative companies | [Free Cash Flow](https://learn.tradelabsai.com/fundamentals/free-cash-flow/) | ## Reading what the price implies Instead of asking "what is it worth?", traders often ask "what does today's price assume?" **Example: A reverse DCF** A company trades at $100 with free cash flow of $2 per share, a 2% FCF yield. If investors require a 9% return, the price implies cash flow must grow at roughly 7% a year indefinitely (using a simple growth model: 9% minus 2% ≈ 7%). If you think 7% long term growth is unrealistic for this business, the stock looks expensive; if you expect much faster growth, it may be cheap. See [Terminal Value](https://learn.tradelabsai.com/fundamentals/terminal-value/). ## Market cap and enterprise value ``` market capitalisation = share price × shares outstanding enterprise value = market cap + debt - cash (+ preferred stock and minority interests) ``` Enterprise value is the price of the whole business, including what is owed to lenders. It is used with measures like EBITDA and sales that belong to all capital providers. See [EV/EBITDA and EV/Sales](https://learn.tradelabsai.com/fundamentals/ev-ebitda-and-ev-sales/). ## Why valuation is hard - **Forecasts are uncertain,** especially years ahead. - **Small changes in assumptions** (growth, discount rate) cause large changes in value. - **Markets can stay "irrational"** for long periods. - **Accounting differences** distort comparisons. - **Quality matters:** a great business can justify a high multiple. See [Competitive Advantage and Moats](https://learn.tradelabsai.com/fundamentals/competitive-advantage-and-moats/). ## Valuation and trading Valuation rarely times short term moves, but it shapes long term returns and the risk of large drawdowns. Very expensive stocks need excellent results to justify their prices, so disappointments can cause sharp falls; cheap stocks can rally on small positive surprises. Many traders combine valuation with technical analysis and catalysts. See [Technical vs Fundamental Analysis](https://learn.tradelabsai.com/fundamentals/technical-vs-fundamental/). ## Common mistakes - **Calling a stock cheap because its price has fallen.** See [Anchoring](https://learn.tradelabsai.com/psychology/anchoring/). - **Comparing multiples across very different industries.** - **Ignoring debt** when comparing P/E ratios. - **Treating a model's output as precise.** ## Frequently asked questions ### What is stock valuation? Estimating what a company or share is worth, using approaches such as discounted cash flow analysis and comparisons with similar companies. ### What is the difference between intrinsic and relative valuation? Intrinsic valuation estimates value from a company's own future cash flows; relative valuation compares its multiples with similar companies. ### What drives a company's value? Its cash flow, the growth of that cash flow and the risk of achieving it. Next, learn the most popular multiple in [P/E and Forward P/E](https://learn.tradelabsai.com/fundamentals/p-e-and-forward-p-e/). ## Continue learning - Next lesson: [P/E and Forward P/E](https://learn.tradelabsai.com/fundamentals/p-e-and-forward-p-e/) - Previous lesson: [Debt, Cash and Shareholders' Equity](https://learn.tradelabsai.com/fundamentals/shareholders-equity/) - Related: [Debt, Cash and Shareholders' Equity](https://learn.tradelabsai.com/fundamentals/shareholders-equity/): Shareholders' equity is assets minus liabilities, the book value owned by shareholders. Learn its parts, how buybacks change it and why it can be negative. - Related: [P/E and Forward P/E](https://learn.tradelabsai.com/fundamentals/p-e-and-forward-p-e/): The P/E ratio compares a stock's price with its earnings. Learn trailing vs forward P/E, earnings yield, what high or low P/E means and the ratio's limits. - Related: [DCF Valuation](https://learn.tradelabsai.com/fundamentals/dcf-valuation/): A DCF values a company by forecasting free cash flows and discounting them to today. Learn the steps, a worked example, sensitivity analysis and common mistakes. - Related: [Comparable Companies and Precedent Transactions](https://learn.tradelabsai.com/fundamentals/comparable-companies/): Comparable company analysis values a business using the multiples of similar companies. Learn how to pick peers, build a comps table and adjust for differences. - Related: [EV/EBITDA and EV/Sales](https://learn.tradelabsai.com/fundamentals/ev-ebitda-and-ev-sales/): EV/EBITDA and EV/Sales compare a company's total value, including debt, with its earnings or revenue. Learn how to calculate EV, when to use each and the limits. - Related: [Technical vs Fundamental Analysis](https://learn.tradelabsai.com/fundamentals/technical-vs-fundamental/): Technical analysis studies price and volume; fundamental analysis studies business value. Compare their methods, horizons and evidence, and how to combine them.