Valuation metrics explained
Places selected valuation multiples such as P/E, P/FCF, P/S and PEG relative to a suitable peer group. The narrower industry group is used by preference. Where its data is too thin, the parent sector takes over. Where there is no sufficient comparison basis there either, the metric is left unrated. Lower valuation multiples lead to higher scores within this analysis area. No fair share price and no expected return is derived from it.
What is the price-to-earnings ratio (P/E)?
Share price divided by earnings per share, shown as a multiple. A P/E of 39.5× means the share price is 39.5 times the earnings per share used. Comparable levels differ markedly by sector and business model, which is why the score measures this against the median of the peer group rather than a fixed threshold. When the company made a loss the P/E is undefined; we then show and score the earnings yield, its inverse.
What is the price-to-sales ratio (P/S)?
Share price divided by revenue per share over the period used, shown as a multiple. It stays computable even where earnings are negative. Comparable levels differ markedly by sector and margin structure.
What is the price-to-free-cash-flow ratio?
Share price divided by free cash flow per share, shown as a multiple. It is calculated from the market capitalisation and the free cash flow of the most recent fiscal year. It sets the price against a cash-based result and complements earnings-based multiples such as the P/E. When free cash flow is not positive the multiple is not meaningful; we then show the free cash flow yield, its inverse, and without reported capital expenditure the operating cash flow yield.
What is the growth-adjusted P/E (PEG ratio)?
The P/E divided by the earnings growth rate used, shown as a multiple. How much it says depends heavily on which growth estimate goes in. At very low or negative growth it cannot be read meaningfully at all.
What is the earnings yield?
Net income relative to market capitalisation — the inverse of the P/E. We show and score it instead of the P/E when the company made a loss: the P/E is then undefined, while the earnings yield turns negative and stays comparable with the peer group. Higher values are cheaper.
What is the free cash flow yield?
Free cash flow of the most recent fiscal year relative to market capitalisation — the inverse of the price-to-free-cash-flow multiple. We show it instead of the multiple when free cash flow is not positive: the multiple is then not meaningful, while the yield stays comparable. Higher values are cheaper.
What is the operating cash flow yield?
Operating cash flow of the most recent fiscal year relative to market capitalisation. We show and score it when free cash flow cannot be derived because no capital expenditure is reported. Capital expenditure is not in this figure, so it is not a free cash flow yield.
How the metrics become a score
How a metric is placed within its comparison group, and how the area scores and the metrics score are formed from it, is described in the methodology.