Stock-Market Valuation, From Price to Business Value
Two tickers sit on your watchlist — one trades at $20, the other at $200 — and your gut swears the cheap one's the bargain. Valuation is the math that checks your gut before your money moves.
A share price by itself tells you almost nothing. These fifteen terms connect that price to sales, profit, assets, and growth — the things a business is actually worth.
Price Meets Profit
The classic ratios all do the same trick: divide what you pay by what you get. Four terms cover the arithmetic everyone quotes.
- Share Price: Share price is what buyers and sellers currently agree to pay for one share — nothing more.
- Earnings per Share (EPS): EPS divides profit available to common shareholders by the average share count. It's profit per slice.
- Price-to-Earnings Ratio (P/E): The P/E ratio divides share price by earnings per share — the quickest read on what you're paying for a dollar of profit.
- Price-to-Book Ratio (P/B): The P/B ratio compares a company's market price with its book value per share — price versus what's on the books.
The Business Behind the Ticker
Ratios are only as good as the numbers underneath them. These four are the numbers underneath.
- Revenue: Revenue is money a business recognizes from its ordinary sales before costs and expenses come out.
- Earnings: Earnings are the profit left after those costs and expenses are subtracted.
- Profit Margin: Profit margin shows profit as a percentage of revenue — how much of each sales dollar survives the trip.
- Growth Rate: Growth rate measures how fast a number is changing over a stated period, usually as a percentage.
What's It Actually Worth?
Here's where valuation earns its name: price is what you pay, and these four estimate what you get.
- Valuation: Valuation is the whole exercise of estimating what an asset, stock, or business is worth.
- Intrinsic Value: Intrinsic value is an estimate of underlying worth, built from the benefits an asset may produce and the risks in the way.
- Market Value: Market value is what the open market would pay right now — current mood included.
- Book Value: Book value is roughly assets minus liabilities on the balance sheet. Call it the accountant's answer.
Labels Investors Argue About
Wall Street loves sorting stocks into buckets. The buckets are fuzzy, but you'll hear these three constantly.
- Growth Stock: A growth stock belongs to a company expected to expand sales or earnings faster than its peers or the market.
- Value Stock: A value stock looks inexpensive next to its earnings, assets, cash flow, dividends, or estimated worth.
- Blue-Chip Stock: A blue-chip stock is the informal badge for a large, established, widely recognized company.
Run the Numbers Yourself
Theory sticks better with a real ticker in front of you. Try analyzing a stock in five minutes, borrow the ratios Warren Buffett leans on, or go deeper with the principles of the intelligent investor.
Next time a stock looks cheap, ask "compared with what?" — then actually check.