Definition
Valuation metrics are the measures investors use to compare a stock's market price with earnings, assets, cash flow, sales, or enterprise value.
Common examples
- Price-to-earnings
- Price-to-book
- Enterprise value to EBIT
- Enterprise value to EBITDA
- Price to free cash flow
Why it matters
A business can have strong profitability and still be a poor investment if the stock is priced too richly. Valuation metrics help connect operating quality with purchase price.
Where to apply it
Use valuation metrics after profitability work. For example, calculate Basic Earning Power first to judge operating strength, then use valuation measures to decide whether that strength is already priced in.